Intertemporal capital asset pricing model

Imagine you have a piggy bank, and you want to save up some money to buy a toy you really want in the future. Your parents give you two options: you can either put your money in a small box under your bed or put it in a bank where it will earn interest over time.

Now, let's say you choose to put your money in the bank. The bank promises to give you some extra money (called interest) if you keep your money there for a certain amount of time. However, because they are giving you this extra money, they are taking on some risk - there's always a chance that they won't be able to pay you back the interest they promised.

This is similar to the Intertemporal Capital Asset Pricing Model (ICAPM)! Investors have the option to either invest their money in a risk-free asset (like the box under your bed) or in a risky asset (like the bank or a stock). The risky asset may earn more money over time, but it also has a higher chance of losing money.

The ICAPM tries to help investors figure out the right balance between these two options. It looks at things like how much risk the investor is willing to take on, how much they expect to earn from the risky asset, and their expectations for inflation and interest rates in the future.

Overall, the ICAPM helps investors make informed decisions about how to invest their money based on their individual needs and preferences.