Please define CAPM for me.
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; however, it's still used a great deal in the finance industry. Briefly show the interviewer that you are familiar with CAPM.
"CAPM stands for Capital Asset Pricing Model. CAPM has been helpful for me in the past when it comes time to determine if a 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 it comes to 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 do 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, beta of the investment, expected return of market, and market risk premium."
