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Background: CAPM and Regression in Excel
The Capital Asset Pricing Model computes the expected return of a given stockbased on the risk-free rate (Rf), the expected return of the market (Rm), and Beta(B).Often to implement the CAPM, we use an index model and thus use realized/historical returns. Given that the CAPM is a statement about expected returns, the index model can be modified to reflect this.
The CAPM decomposes a stockâ€™s variability into market (systematic) risk and firm-specific effects that can be diversified away.
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