CAPM (Capital Asset Pricing Model)

The Capital Asset Pricing Model (CAPM) is a financial formula that helps investors understand the expected return of an investment based on its risk. It considers the risk-free rate (like a government bond), the investment's sensitivity to market changes (beta), and the overall market's return. Essentially, CAPM shows that higher-risk assets should offer higher potential returns to justify the risk taken. It's used to help investors make informed decisions about which investments to pursue, balancing risk and reward in a predictable way.