M&A Interview - Mergers and Acquisitions
CAPM is the Capital Asset Pricing Model, and it is a model designed to find the expected return on an investment and therefore the appropriate discount rate for a company’s cash flows. It is a linear model with one independent variable: beta.
CAPM divides the risk of holding risky assets into systemic and specific risks. To the extent that any asset is affected by general market moves, that asset entails systematic risk. Specific risk is the risk which is unique to an individual asset. It represents the component of an asset’s volatility which is uncorrelated with general market moves. According to CAPM, the marketplace compensates investors for taking systematic risk, but not specific risk.
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