General Investing
  -General information about
  getting started.
Stocks
  -How investing in the stock
  market works
Bonds
  -How bond investing works
Mutual Funds
  -How mutual funds work
Economics
  -A basic intro to the economy
Advanced Investing Topics
  -This section covers topics
   like futures and options

Capital Asset Pricing Model
Term category: Advanced, Stocks
In 10 words or less: A model that allows you to price stocks and other securities.

Definition: A model that allows investors to price securities, such as stocks, based on the risk-free rate, market returns, and the security's volatility.  The equation is characterized as:

ER_k = r_f + B_k (ER_p - r_f), where:

ER_k is the expected return on the stock for the year
r_f is the risk free rate of return
B_k is the beta of stock k
ER_p is the expected return on the market portfolio (typically the S&P500)

Advice: As long as you believe that beta is an accurate portrayal of a stock's risk relative to the market, CAPM is a great way to price securities.  Many analysts use it to calculate a stock's cost of equity.

 

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