What Is CAPM?
The Capital Asset Pricing Model, commonly known as CAPM, is a financial model used to evaluate investment risk and rates of returns compared to the overall market. You can use CAPM to price an individual asset, or a portfolio of assets, using a linear model.
The CAPM Formula
The CAPM formula is given by:
Where:
Using CAPM, you can calculate the expected return for a given asset by estimating its beta from past performance, the current risk-free (or low-risk) interest rate, and an estimate of the average market return.
Implementing CAPM in MATLAB
MATLAB® offers specialized functions in its Statistics and Machine Learning Toolbox™ to estimate the parameters of CAPM through regression analysis. However, one common issue that arises is the use of incomplete or missing data when estimating beta. To mitigate this, Financial Toolbox™ provides functions for missing data estimation, reducing your estimation risk when utilizing CAPMs derived from data sets containing missing data.
Examples and How To
Software Reference
See also: portfolio optimization, Black-Litterman, financial engineering