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What is The Capital Asset Price Model?

Definition of The Capital Asset Price Model

The Capital Asset Price Model (CAPM) is a model that is used to calculate the relationship between risk and expected return for any given volatile asset. This model is based on the notion that investors must be compensated for the Time Value of Money (for investing a given amount of money over a specific period of time) as well as the riskiness of an investment because the longer term an investment, the more interest will be accrued and therefore the same level of risk now applies to a larger sum of money (relative to if no interest had been accrued). Typically, an asset's value increases according to the inherent risk level of the asset, as many investors would be reluctant to invest in a risky asset, so to compensate the investor for the potential loss the interest is generally higher.
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