Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model (CAPM)

A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.If this expected return does not meet or beat the required return, then the investment should not be undertaken.

 CAPM:           

            R_a = R_f + (R_m - R_f) β_a 

Here, R_f  = Risk free rate

        R_m= Expected market return

          β_a = Market risk of the sucurity

 The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (r_f) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).

Definition of Management by Objective (MBO)

Definition of Management by Objective (MBO):

According to Peter F. Drucker,  

"Management by objective is regarded as a system for Improving performance, both of the individual manager’s and the enterprise as a whole, by setting of objectives at the corporate, departmental and individual manager's level”.

According to Tosi and Carroll,
“Management by objectives is a process in which the manager and subordinates together agree upon a set of activities, targets, dates, and goals which will be used as the criteria to the subordinates performance and evaluation”.