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Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is a financial tool that helps investors understand the relationship between risk and expected return on investments, particularly stocks. It suggests that to earn a higher return, investors must take on more risk. CAPM calculates an investment's expected return based on its risk compared to the overall market, using a formula that incorporates the risk-free rate (like government bonds), the investment's volatility (beta), and market return. Essentially, it helps investors make informed decisions by quantifying how much extra return they should expect for the risks they are taking.

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    The Capital Asset Pricing Model (CAPM) is a financial theory that helps investors understand the relationship between risk and expected return on an investment. It suggests that the expected return on an investment is equal to the risk-free rate plus a risk premium, which compensates for the investment’s risk compared to the overall market. Essentially, it shows that riskier assets should offer higher potential returns. CAPM is used to determine whether an asset is fairly valued, helping investors make informed decisions regarding their portfolios.