Application of Capital Asset Pricing Model in Finance

Abstract

In the financial sector, Mathematics is indispensable everywhere. To be precise, Portfolio Optimization and Risk Management are two common methods under investment. The article introduces Portfolio Optimization and Risk Management to explain how mathematics using in Finance. In Portfolio Optimization plate, this article starts with the basic theories, which include Markowitz portfolio theory and combine with the celebrated Capital Asset Pricing Model (CAPM). In Risk management, the article specifically describes how do calculus used in Value-at-Risk (VaR) and conditional VaR. This article uses specific data and function to explain how math using in these sectors. CAPM model makes it possible for investors to assess and choose among competing financial based on absolute risk as opposed to overall risk. The primary benefits of CAPM are its clarity and simplicity. It breaks down the cost of any risk security into three components: risk price, risk calculation unit, and risk-free rate of return. These three components are then naturally combined.