International Capital Asset Pricing Model (CAPM)


International Capital Asset Pricing Model (CAPM)

A financial model that extends the concept of the capital asset pricing model (CAPM) to international investments. The standard CAPM pricing model is used to help determine the return investors require for a given level of risk. When looking at investments in an international setting, the international version of the CAPM model is used to incorporate foreign exchange risks (typically with the addition of a foreign currency risk premium) when dealing with several currencies.

CAPM is a method for calculating anticipated investment risks and returns. The model was developed by economist and Nobel Memorial Prize winner William Sharpe. It says that the return on an investment should equal its cost of capital and that the only way to earn a higher return is by taking on more risk. Investors can use CAPM to evaluate the attractiveness of potential investments. There are several different versions of CAPM, of which international CAPM is just one.


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