CAPM

The Capital Asset Pricing Model (CAPM) is a financial tool used to determine the expected return on an investment, considering its risk. It suggests that the return on an investment should compensate investors for the risk they are taking compared to a risk-free asset, like government bonds. CAPM incorporates the stock's beta, which measures its volatility relative to the market; a higher beta means greater risk and, accordingly, a higher expected return. Essentially, CAPM helps investors evaluate whether an investment's potential reward justifies its associated risk.