Consumption-based capital asset pricing model

The consumption-based capital asset pricing model (CCAPM) is used in finance and economics as an expansion of the capital asset pricing model (CAPM). The CCAPM factors in consumption as a means of understanding and calculating an expected return on investment.

The CCAPM implies that the expected risk premium on a risky asset, defined as the expected return on a risky asset less the risk free return, is proportional to the covariance of its return and consumption in the period of the return.The consumption beta is included and the expected return is calculated as follows:[1]

r= rf + B(rm - rf)

r = expected return on security or portfolio

rf = risk free rate

B = consumption beta (of individual company or weighted average of portfolio), and

rm = return from the market


References

  1. ↑ Romer, David. Advanced Macroeconomics, ch. 7.
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