CAPITAL ASSET PRICING MODEL

In the financial field of online stock trades, capital asset pricing model (CAPM) is used for calculating the proper required rate of return for a stock. For calculation this model takes the sensitivity of asset to the systematic risk in to account in online stock trades. It is often represented by beta (β). Capital asset pricing model was developed with the help of jack Treynor, William Sharpe, john Linter and Mr. Jan. This model was derived from the modern portfolio theory.  Sharpe received Nobel memorial award for contributing in the financial field of online stock trades.
CAPM can be use for defining the pricing worth of an individual security in online stock trades. In case of individual securities we use security market line and its influence with stock return and systematic rick. SML provide us the facility to calculate Reward risk ratio of any security to the market value. Whenever any security’s rate of return (expected) is deflated by the value of its beta coefficient than reward to risk ration will be equal to the online stock trades market reward to risk ratio, than the mathematical expression can be written as,
E (Ri – Rf)  = E (Rm) – Rf
        βi
E (Ri)  = Rate of return (expected) on asset in online stock trades.
βi         = Rate of interest which is risk free in online stock trades
E (Rm) = Rate of return of online stock trades market (expected)
Rf         = rate of interest with no risk in online stock trades
With the use of CAPM in online stock trades, all investors want to maximize their economic utility. All the investors of online stock trades can lend and borrow risk free interest rate. They can do their trading without tax costing. CAPM enables to provide all the information to all the investors of online stock trades at the same time.