Definition
The Capital Asset Pricing Model calculates expected return based on an asset's beta and the expected market return. It assumes investors are compensated only for systematic risk (beta), not unsystematic risk which can be diversified away. CAPM is fundamental to finance despite its simplifying assumptions.
Formula
Example
With 3% risk-free rate, 10% market return, and beta of 1.5, CAPM predicts expected return of 13.5%.
FAQ
What is CAPM (Capital Asset Pricing Model)?
A model that describes the relationship between risk and expected return.
How do you calculate CAPM (Capital Asset Pricing Model)?
A common formula for CAPM (Capital Asset Pricing Model) is: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)
Why is CAPM (Capital Asset Pricing Model) important?
CAPM (Capital Asset Pricing Model) helps investors evaluate valuation and make more informed decisions.
Related Terms
Beta
A measure of a stock's volatility relative to the overall market.
Risk-Free Rate
The theoretical return of an investment with zero risk.
Equity Risk Premium
The excess return investing in stocks provides over the risk-free rate.
Systematic Risk
Market-wide risk that cannot be diversified away, affecting all securities.