The Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is a financial tool used to determine the expected return of an investment based on its risk compared to the overall market. It helps investors understand how much they should earn for taking on additional risk. The model considers the risk-free rate (like government bonds), the investment’s sensitivity to market movements (called beta), and the market's average return. Essentially, CAPM guides investors in making informed decisions about whether an investment's potential reward justifies its risk, promoting efficient portfolio management.