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The CAPM Computes Expected Rates of Return on Common Equity

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Essay

The CAPM computes expected rates of return on common equity capital using the following model:
E[REj] = E[RF] + b j x {E[RM] - E[RF]}
What are the roles of each of the three components of this model?


Definitions:

Research Hypotheses

Statements made by researchers that predict a relationship between variables, to be tested by scientific research.

Samples and Populations

Concepts in statistics where a sample represents a subset of a larger group (population) from which it is drawn and is used to infer properties about the population.

Dependent Variable

The variable in an experiment or study that is expected to change in response to manipulations of the independent variable, representing the effect or outcome.

Nominal

Relating to variables that consist of categories or labels with no inherent order or ranking among them.

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