From the course: Finance Foundations

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Beta: The concept

Beta: The concept

From the course: Finance Foundations

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Beta: The concept

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It's time to talk about what is probably the most famous finance model, the capital asset pricing model, called the CAPM. This famous model starts with some simple insights. We know that people are risk averse, so you have to pay us to get us to accept risk. Some risk can be eliminated through diversification, but there are some risks that cannot be eliminated through diversification. We call this risk systematic risk. For example, when the economy moves broadly, everybody gets impacted, everybody floats up, everybody floats down. For example, in the years 2000 through 2002, in the wake of the bursting of the Internet bubble, all of us felt our economic circumstances go down and there was no way to protect yourself from that through diversification, because everybody was impacted. In a similar fashion, during 2008 and 2009, there was a global economic recession. Everyone in the world was impacted by that recession. There was no way to avoid that risk. So there are some risks that…

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