Asset Pricing Model

The Asset Pricing Model is a tool used to determine the expected return on an investment based on its risk compared to the overall market. It helps investors understand how much they should earn based on the uncertainty associated with a particular asset. The key idea is that riskier investments typically offer higher potential returns. This model considers factors like market risk, the asset's volatility, and the risk-free rate (like government bonds). Investors use it to make more informed decisions about where to allocate their money and to assess whether a stock or investment is fairly valued.