🔴 3 Minutes! CAPM Finance and the Capital Asset Pricing Model Explained (Quick Overview)


CAPM Capital Asset Pricing Model Explained
in 3 Minutes Imagine you have a friend named Bob with his
money safely deposited in a bank at a 5% interest rate per year� and that you have a scary
and risky company which also earns an average 5% profit for owners or investors per year�Can
you convince Bob to withdraw his money from the bank and invest in your business? No way! If your business is riskier than the
bank, then Bob would want an average return much bigger than 5%. Now what if�
Bob also has some money invested in the general stock market, which is kinda risky, but not
as risky as your scary company� and he earns an average profit of 8% per year. Can you offer Bob also 8% to convince him
to sell his stock market portfolio and invest in your company instead? Again, no way! If
your company is riskier and scarier than the general stock market, then you would have
to offer Bob an average return higher than 8%, to reward Bob for his higher risk. So the question now is� exactly how much
average % return should you offer Bob, to make his investment worth his risk in your
scary company? This % is called your �cost of equity�� and we calculate it using
the CAPM or Capital Asset Pricing Model Formula. The Capital Asset Pricing Model or CAPM formula
factors in Bob�s risk and return from his other investments, and then tells us how much
Bob should reasonably expect from your riskier company. That�s why your �cost of equity�
is also called your investor�s �expected return.� Would you like learn the CAPM with
more analysis and detail as well as how to calculate it the EASY way? Check out my FREE step-by-step tutorial video
and download my FREE cheat-sheet on CAPM at MBAbullshit.com. See ya there!

Paul Whisler

41 Comments

  1. Hi there, finance just so happens to be the most difficult subject in MBA for most, LOL. But on my website I'll soon be posting lots of stuff specifically about the entrepreneurship aspect. Cheers. 🙂

  2. your videos are always simple enough to make complicated things understandable to everyone. thank you for your sharing.

  3. @Ming I'm so glad you find it simple instead of complicated!

  4. Thanks! Now I understand Beta completely!

    You did awesome job.

  5. this guy is good!!!! its show the explanation so easy that is unbelievable. love it. are you hiring? : )

  6. wow…just watched ur video…its so easy to understand the most difficult concepts of financial mgt…thanx for the upload…!!

  7. God!. this is amazing..i wanna know more about CAPM and beta.. where shall i find it bro?

  8. @Royston, you can click on my username and go to my channel, and you can find the beta video on my website, cheers

  9. im a new subscriber.. i failed my module on finance for the 2nd time… i wish i had discovered your channel earlier before i had my 1st exam! oh well nice videos!

  10. @VaanillaIce wow, I'm glad you found my channel so I hope you don't fail your next module!

  11. Finally… someone who explains this topic in an easier way! Thank you! Greetings from Colombia! 

  12. If anyone can help please. How can I create such videos using laptop / pc

  13. how I wish you cud do the kage bunshin technique -_- . a teacher like you shud multiply around the world and make every school a better place 🙂

  14. A complex definition converted to a simplistic definition. Thank you so much!

  15. Your videos are really nice.You explain it all in a simple way 🙂

  16. ধন্নবাদ its Thanks in out language Bengali . Keep supporting us by this kind of VDOs

  17. Amazing clip, this makes me love finance even more, btw its midnight n am studying in some cold room with no shirt on coz i have to finish the chapter on CAPM by morning n the text book am using is very boring.

  18. 77. What is the unit cost for Job 73?
    The following information is available at the end of the period for the completed Job 73:

    
    Beginning balance
    $17,000
    Direct materials
    30,600
    Direct labor
    24,500
    Overhead applied
    41,700
    Total number of units produced
    35,000
    Total number of units sold
    28,500

  19. Dear MBAbullshitDotCom,
    this is the first comment I ever leave on youtube, but before I close this tab I must thank you for your channel.
    I am studying on a MSc in business management and in the last days I have been watching all your videos (liking and sharing them with other students!).
    My exam was just few hours ago, I think I did quite ok, but I would have not been able to attend it without your clarifications.
    I come from arts and humanities studies, I missed all the basics of finance and without your videos it would have been impossible for me to understand the most sophisticated theories required by this master. Plus, I think most of business people just operate their brain differently… I am used to always see the bigger picture and to simplify things, they instead get stuck in the process of doing things and forget to tell you what is that process for, why are we doing it and where is going to bring as result…
    It was a relief to find your channel, you have been my hero.
    Life is like a balance sheet, the good you give out, it must comeback to you somewhere else 🙂
    * I send you all my gratitude **

  20. Q1

    Office Pro, a producer of office furniture, is looking to diversify its portfolio, and you have been asked to evaluate the risk and return of two assets (Pepsi and Coca Cola) which it is considering for its asset portfolio. You checked online for the company’s financial statements and found the following historical data for the two assets for the past ten years.

    Pepsi (Beta 0.9) Coca Cola (Beta = 1.5)
    Closing
    Dividends Opening Value Dividends Opening Closing
    Year paid ($) Value ($) ($) paid ($) Value ($) Value ($)
    2007 2,200 20,000 22,000 1,000 25,000 25,000

    2008 2,100 22,000 21,000 800 24,000 25,000

    2009 2,000 21,000 24,000 700 23,000 24,000

    2010 2,000 24,000 22,000 800 23,000 23,000

    2011 1,700 22,000 23,000 900 22,000 22,000

    2012 1,700 23,000 26,000 1,000 21,000 22,000

    2013 1,600 26,000 26,000 1,200 21,000 21,000

    2014 1,500 25,000 24,000 1,000 20,000 21,000

    2015 1,400 24,000 25,000 1,600 20,000 20,000

    2016 1,000 27,000 28,000 1,600 20,000 20,000

    You believe that the past years are a good indicator of the future performance of the assets and the assets risks can be assessed on a standalone basis using standard deviation and coefficient of variation and as a part of Office Pro’s existing portfolio of assets using the Capital Asset Pricing Model (CAPM).

    Your Manager, has asked you to prepare a report which will assist in making a decision for Office Pro. The following are some of the highlights of your report, assuming the market has a risk-free rate of 4 percent and the return on the market is 8 percent:

    a) The Rate of Return for each Asset per year for 2007 to 2016. (2 points)

    b) Each asset’s average rate of return based on the historical annual data provided. (2 points)

    c) Pepsi and Coca Cola’s standard deviation and coefficient of variation. (2 points)

    d) Comment on the risk and return for each asset based on your answers to 2 and 3 above.

    (3 points)
    e) The required return for each asset. (2 points)
    f) A recommendation on investing in which the two assets, giving reasons for your
    recommendation. (2 points)
    g) Comment on the use of standard deviation as oppose to the use of CAPM as a risk
    measurement. (3 points)
    (Maximum 16 points)

  21. After reading my corporate finance textbook a zillion times and researching on the internet for hours, finally came across this video. Gave me the simple information I was looking for. I'm only a couple weeks away from graduating and this has been my least favorite topic so far. Thank you!

  22. This is the clearest and shortest explanation that I found. Now I am going to check out all your video for my finance revision and your videos make finance so interesting.

  23. Im grateful you exist! Im sure finance is a bunch of easy common sense bullshit but these lecturers.. ughhh dont get me started

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