CAPM

Definition
The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk
and expected return for assets, particularly stocks.

Implication
The goal of the CAPM formula is to evaluate whether a stock is fairly valued when its risk and the
time value of money are compared to its expected return. The expected return of the CAPM formula
is used to discount the expected dividends and capital appreciation of the stock over the expected
holding period.
Limitations
There are several assumptions behind the CAPM formula that have been shown not to hold in reality.
(1) securities markets are very competitive and efficient (that is, relevant information about the
companies is quickly and universally distributed and absorbed);
(2) these markets are dominated by rational, risk-averse investors, who seek to maximize satisfaction
from returns on their investments.
Application

CAPM is widely used throughout finance for pricing risky securities and generating expected returns
for assets given the risk of those assets and cost of capital.

Dividend Discount Model – DDM

Definition
The dividend discount model (DDM) is a quantitative method used for predicting the price of a
company's stock based on the theory that its present-day price is worth the sum of all of its
future dividend payments when discounted back to their present value.
It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and
takes into consideration the dividend pay-out factors and the market expected returns. 
Formula
Variation
The most common and straightforward calculation of a DDM is known as the Gordon growth model
(GGM), which assumes a stable dividend growth rate. This model assumes a stable growth in
dividends year after year. 
Equation for GGM

D=the estimated value of next year’s dividend
r=the company’s cost of capital equity
g=the constant growth rate for dividends, in perpetuity