CAPITAL ASSET PRICING MODEL

The Capital Asset Pricing Model (CAPM) is a fundamental financial theory that explains the relationship between risk and expected return in valuing assets and portfolios. This course introduces students to the theoretical foundation, assumptions, applications, and limitations of CAPM. It covers concepts such as risk-free rate, market portfolio, beta coefficient, security market line (SML), and portfolio optimization. The course equips learners with the skills to apply CAPM in asset valuation, investment decision-making, and risk management.

Objectives

  • Provide an in-depth understanding of the Capital Asset Pricing Model and its theoretical underpinnings.
  • Explain the relationship between systematic risk and expected return.
  • Develop the ability to compute and interpret the beta coefficient and risk premium.
  • Equip students with skills to apply CAPM in portfolio management and asset pricing.
  • Examine the assumptions, criticisms, and alternative models to CAPM.
  • Enhance analytical skills in using CAPM for investment decision-making and performance evaluation.

Learning Outcomes

  • Define and explain the concepts of risk, return, and their relationship under CAPM.
  • Calculate expected returns using the CAPM formula.
  • Analyze the role of beta in measuring systematic risk.
  • Apply CAPM to evaluate securities, portfolios, and capital budgeting projects.
  • Interpret and graph the Security Market Line (SML).
  • Critically assess the limitations of CAPM and compare it with other asset pricing models (e.g., Arbitrage Pricing Theory).
  • Use CAPM as a tool in investment analysis and risk management.

Academic Year 2024-2025

Lecturer: Peter Kasaija