International Capital Asset Pricing Model (CAPM)

AAA

DEFINITION of '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.

BREAKING DOWN 'International Capital Asset Pricing Model (CAPM)'

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.

RELATED TERMS
  1. Cost Of Capital

    The required return necessary to make a capital budgeting project, ...
  2. Fama And French Three Factor Model

    A factor model that expands on the capital asset pricing model ...
  3. Equity Risk Premium

    The excess return that an individual stock or the overall stock ...
  4. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
  5. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  6. Beta

    A measure of the volatility, or systematic risk, of a security ...
Related Articles
  1. Bonds & Fixed Income

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
  2. Investing Basics

    Beta: Know The Risk

    Beta says something about price risk, but how much does it say about fundamental risk factors? Find out here.
  3. Fundamental Analysis

    Taking Shots At CAPM

    Find out why many investors think the capital asset pricing model is full of holes.
  4. Options & Futures

    How Risk Free Is The Risk-Free Rate Of Return?

    This rate is rarely questioned - unless the economy falls into disarray.
  5. Fundamental Analysis

    The Capital Asset Pricing Model: An Overview

    CAPM helps you determine what return you deserve for putting your money at risk.
  6. Fundamental Analysis

    Catch On To The CCAPM

    The consumption capital asset pricing model smoothes over some of CAPM's weaknesses to make sense of risk aversion.
  7. Forex Education

    Reduce Your Risk With ICAPM

    Avoid unnecesary risks involved in CAPM calculations by also incorporating ICAPM into the mix.
  8. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  9. Markets

    The 5 Biggest Chinese Natural Gas Companies

    Read about the top five Chinese natural gas companies as measured by gas production volume and learn a little more about their business operations.
  10. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
RELATED FAQS
  1. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  2. What is the difference between a greenfield investment and a regular investment?

    A greenfield investment is a particular type of investment where an international company begins a new operation in a foreign ... Read Full Answer >>
  3. What are the benefits for a company investing in a greenfield investment?

    Advantages of greenfield investments include increased control, the ability to form marketing partnerships and the avoidance ... Read Full Answer >>
  4. Why did China designated certain territories as special administrative regions?

    The primary reason for the People's Republic of China designating two territories as special administrative regions, or SARs, ... Read Full Answer >>
  5. What emerging markets are best positioned to benefit from growth in the utilities ...

    Emerging market economies expected to benefit the most from growth in the utilities sector include China, India, Brazil and ... Read Full Answer >>
  6. What are some examples of a Foreign Institutional Investor (FII)?

    Foreign Institutional Investors A foreign institutional investor, or FII, is a hedge fund manager, pension fund manager, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  5. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!