In my role as a Financial Analyst at FortyTwo Investments, I regularly use the Capital Asset Pricing Model (CAPM) to evaluate potential investments. The CAPM is a critical tool in our arsenal, guiding us in quantifying the risk-return trade-off for different securities and helping us construct balanced portfolios.
For a recent client, we used Bloomberg terminals to gather the necessary inputs: the beta of the stock, the risk-free rate, and the expected market return. Once these inputs were gathered, we ran the CAPM formula to determine the expected return of the stock.
For example, if the expected return from CAPM was 7% and the stock's price suggested a lower return, we would not invest. On the other hand, if the calculated return was higher than the price-implied return, we would consider it a good investment. In this way, CAPM is an integral part of our investment decision-making process.