Question

Discuss the consumption capital asset pricing rule for a risky asset

Answer 1

We like the CAPM and the APT because they both capture risk and

return, but are their related to our more fundamental needs:

consumption of goods.

• What do we mean by “The equity premium puzzle is too high”?

• We will work out a “simple” model where assets are priced explicitly

relative to our utility from consumption.

• This explicit model will generate a familiar stochastic discount factor

pricing relation.

• A structural model like this may answer the question: What do we

mean by “The equity premium puzzle is too high”?

Answer 2

Explanation:

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.