What is Capital Asset Pricing Model?

Abstract

Capital Asset Pricing Model, as one of the basic theories in finance and investment area, developed a model for estimation of expected rate of return and equity cost of capital. This model has many applications in the field of finance. Investors consider to various factors to choose and buy stocks. One of the most important factors is liquidity. The liquidity refers to the exchange and transaction ability of a stock as soon as possible. Liquidity is fairly a new subject of study in financial management field. The first quantitative and testable regard to liquidity was by Amihud and Mendelson in 1986.

Keywords: Capital Asset Pricing Model(CAPM), Return, Liquidity, Beta