# Lintner's Model

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## Definition of 'Lintner's Model'

Lintner's Model is a model that describes the relationship between the risk and return of a stock. It was developed by John Lintner in 1965.

The model is based on the idea that investors are risk-averse, and that they will only invest in a stock if they expect to earn a higher return than the risk-free rate. The risk-free rate is the return that investors can earn on a risk-free investment, such as a U.S. Treasury bond.

Lintner's model states that the expected return on a stock is equal to the risk-free rate plus a risk premium. The risk premium is the additional return that investors require to compensate them for the risk of investing in the stock.

The risk premium is determined by the stock's beta coefficient. Beta is a measure of the stock's volatility relative to the market. A stock with a beta of 1 has the same volatility as the market. A stock with a beta of greater than 1 is more volatile than the market, and a stock with a beta of less than 1 is less volatile than the market.

Lintner's model can be used to estimate the expected return on a stock. To use the model, you need to know the stock's beta coefficient and the risk-free rate. Once you know these two values, you can calculate the expected return on the stock using the following formula:

Expected return = Risk-free rate + (Beta * Market risk premium)

The market risk premium is the average return that investors require to invest in the stock market. It is typically estimated to be around 5%.

Lintner's model is a useful tool for investors who want to understand the relationship between risk and return. The model can be used to estimate the expected return on a stock, and to compare the risk and return of different stocks.

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