Capital Asset Pricing Model Excel Spreadsheet
The Capital Asset Pricing Model (CAPM) describes the relationship between risk and expected return and is used in pricing the risk of stocks.
The general idea behind CAPM is that investors need to be compensated in two ways: time value of
money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk.
The spreadsheet will allow traders to calculate whether a particular stock is undervalued using the CAPM. It will also allow the trader to calculate a target price for any given security. The target price will determine the value of the stock compared to its current share price. This is a very powerful tool when combined with technical analysis in stock trading. Big institutions have been using it for years.
Contributor's Notice:
All that is required is a basic understanding of CAPM. Just follow the instructions and the spreadsheet will do the rest.
Files included in member's computer:
Capital Asset Pricing Model.xls
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Contributed by Ninja
