Capital Asset Pricing Model and Arbitrage Pricing Theory — Which one? When?
What is CAPM:
“The excess return on any stock”
CAPM, allows predicting the relationship between the risk of an asset and its expected return. This provides a benchmark rate of return for evaluating asset returns. Additionally, the CAPM model can be used to derive an expected return on yet to be traded publicly, e.g. IPOs and major projects. (Bodie, et al., 2014)
The model by Harry Markowitz published by William Sharpe, John Lintner, and Jan…