馃攳
CAPM - What is the Capital Asset Pricing Model - YouTube
Channel: Learn to Invest - Investors Grow
[0]
the capital asset pricing model often
called CAPM for short is an investment
[5]
theory that shows the relationship
between the expected return of an
[9]
investment and market risk to better
understand CAPM I think it will be
[13]
easier if we look at an example and how
it can be used this is the formula for
[18]
CAPM and if you are of the math
persuasion then perhaps this formula
[22]
makes a lot of sense but for the rest of
us let's break it down to try to make it
[27]
a bit simpler so there are only three
inputs that go into CAPM. first is the
[32]
risk-free rate we're going to use the
10-year Treasury note and as of now it's
[36]
September of 2018 the 10-year Treasury
note is about 3% next we have beta. beta
[42]
looks at the relationship between our
investment and the market for our
[45]
example we will use a stock so for us
beta looks at how the stock moves
[50]
compared to how the stock market moves
the market by definition gets a beta of
[55]
1 so let's use Apple stock so we can see
an actual example
[59]
so apples beta is 0.99 and this is
mighty close to 1 so what does this tell
[66]
us
well it tells us that Apple's stock acts
[68]
very similar to the market so if the
markets up 1% well then Apple stock will
[73]
be up almost 1% more exactly it should
be up about 0.99% same is true on the
[80]
downside the market goes down Apple
stock will be down just short of 1% and
[84]
just to see how this impacts things
let's throw a second stock in there
[88]
right now Facebook has a beta of 1.2 so
if the market moves up or down 1%
[94]
Facebook will move up or down 1.2% the
closer the beta is to 1 the more the
[101]
stock moves like the market does the
final input in our formula is the
[106]
expected return of the stock market now
coming up with this number isn't always
[109]
clear some research companies publish
what they expect long term market
[114]
returns to be you can also use a
historical average for our case we're
[118]
going to use the average of the past 10
years which is about 9% per year
[122]
ok so now we have all of our inputs our
risk-free rate is 3% beta for Apple is
[127]
0.99 and for Facebook its 1.2 and then
we have the expected market return of 9%
[133]
okay so let's plug these numbers in so
Rf is the risk-free rate so here we
[138]
could plug in 3 percent this symbol here
this is the Greek symbol for beta for
[144]
Apple we can replace this beta with 0.99
and we could put Facebook's formula down
[148]
here and there we will put 1.2 then in
the parenthesis we have the expected
[153]
market return minus the risk-free rate
they call this the market premium for
[158]
the expected market return we're using
nine percent and for the risk-free rate
[162]
it's the same as the three percent that
we're using over here now for those
[166]
interested the horizontal bar that's
above the R right here and here
[169]
well that bar indicates that this is an
estimate so now we know we're using an
[173]
estimate of expected market return and
that will give us an estimate of the
[177]
return of this asset that's what the
lowercase a stands for and over here M
[182]
that stands for the market so when we
calculate these we end up with eight
[185]
point nine percent for Apple and ten
point two percent for Facebook
[189]
now don't forget the only difference
between Apple's formula and Facebook's
[192]
formula is their individual beta so how
can this be used well one way you can
[197]
use CAPM is to use it in calculating
the WACC of a company WACC is short for
[203]
weighted average cost of capital and
that WACC can be used as a discount
[207]
factor to value a stock in something
like discounted cash flow now
[211]
technically for WACC you would use both
the cost of debt and the cost of equity
[216]
CAPM can be used as the cost of equity
so for a quick illustration as to how it
[221]
can be used let's imagine that Apple and
Facebook have no debt which means that
[225]
whack for both of them is the same as
CAPM let's see how that would play out
[229]
let's imagine that we had an expected
cash flow coming from Apple in two years
[233]
and let's imagine that it is going to be
$1,000 well since cash is more valuable
[239]
today than it is in let's say the two
years well what we can do is use the
[244]
results of our CAPM calculation as a
discount factor so if I'm gonna get
[248]
$1,000 in two years well for Apple using
our CAPM results of eight point nine
[253]
four percent we can use that as a
discount factor and we can see that that
[257]
$1000 in two years is worth eight
hundred and forty two dollars and 61
[262]
cents today for Facebook if we were also
expecting a thousand dollars in two
[266]
years that
be worth eight hundred twenty three
[269]
dollars and forty three cents today so
in theory that's the present value of
[273]
your future cash flow expectations so
what you want to do is pay less than
[277]
that today and if your expectations are
correct well the bigger the gap between
[282]
what you pay today and your calculated
present value the bigger your returns will be
[287]
now CAPM isn't the only way to
calculate a discount rate or an expected
[291]
rate of return there's also something
called the arbitrage pricing theory
[295]
that's quite popular there are also a
few multi-factor models at work as well
[299]
so keep in mind that CAPM is one of a
few choices not the only choice at some
[304]
point in the future I'll do similar
style videos to this on the arbitrage
[308]
pricing theory and multi-factor models
and if you haven't done so already hit
[313]
the subscribe button and I appreciate
you staying with the video all the way
[316]
to the end thanks and I'll see you in the
next video
Most Recent Videos:
You can go back to the homepage right here: Homepage