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A DERIVATION OF THE CAPM FOR PEDAGOGICAL USE
Author(s) -
Brailsford Tim,
Faff Robert
Publication year - 1993
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1993.tb00194.x
Subject(s) - capital asset pricing model , simple (philosophy) , asset (computer security) , economics , mathematical economics , computer science , econometrics , epistemology , philosophy , computer security
A central paradigm in modern finance theory is the capital asset pricing model (CAPM). While the CAPM is invariably taught in introductory finance courses, a derivation is commonly reserved for postgraduate courses. This is primarily because the available CAPM derivations usually assume an advanced knowledge of pure mathematics. This note provides a simple derivation of the CAPM which requires only an understanding of very basic mathematical concepts. The derivation explicitly highlights the link between the capital market line and the security market line which students often fail to comprehend. Our simple derivation can easily be adopted by instructors at all levels.