LO 62.2: Describe the capital asset pricing model (CAPM) including its

LO 62.2: Describe the capital asset pricing model (CAPM) including its assumptions, and explain how factor risk is addressed in the CAPM.
The capital asset pricing model (CAPM) describes how an asset behaves not in isolation, but in relation to other assets and to the market. The CAPM views not the assets own volatility as the relevant measure, but its covariance with the market portfolio, as measured by the assets beta.
The CAPM assumes that the only relevant factor is the market portfolio, and risk premiums are determined solely by beta. As mentioned, risk premiums are important because they compensate investors for losses during bad times. Risk here is determined by the assets movements relative to each other, and not by the assets in isolation.

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