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Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) is a finance formula used to determine the expected return on an investment, based on its risk compared to the overall market. It suggests that investors require a higher return for taking on more risk. The model factors in the risk-free rate (the return of a safe investment), the investment’s sensitivity to market changes (beta), and the expected market return. Essentially, CAPM helps investors understand how much return they should expect given the risk they are taking with their investment.

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  • Image for Capital Asset Pricing Model (CAPM)

    The Capital Asset Pricing Model (CAPM) is a financial formula that helps investors understand the relationship between risk and expected return on an investment. It suggests that the potential return on an investment should be proportional to its risk compared to the overall market. CAPM emphasizes that, to attract investors, riskier assets must offer higher expected returns. The formula takes into account the risk-free rate (like government bonds) and the expected market return, adjusting for the asset's volatility, measured by its beta. This helps investors make informed choices about where to allocate their money based on their risk tolerance.