Please define CAPM.
CAPM (Capital Asset Pricing Model) is a widely used term in finance that describes the relationship between systematic risk and expected return. We can utilize CAPM when pricing risky securities and calculating expected yields. Although CAPM is a widely accepted model, there are some imperfections. Briefly show the interviewer that you are familiar with CAPM.
"CAPM stands for Capital Asset Pricing Model. CAPM has been helpful to me in the past in determining if security is fairly valued. Although there can be issues with CAPM, the method can help investors understand the relationship between expected risk and reward. This understanding can, in turn, help investors to make better decisions when adding securities to their portfolio."
"I understand CAPM to be short for Capital Asset Pricing Model. Although I have not gained a lot of exposure to the model, I understand that the formula is ERi Rf ?i (ERm - Rf). I learned a bit about this and believe it has to do with the expected return of investment, risk-free rate, the beta of the investment, expected return of the market, and market risk premium."
