The Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) is a financial formula that helps investors assess the expected return on an investment based on its risk compared to the overall market. It suggests that the potential return of an asset is directly related to its risk, which is measured by its beta (a measure of volatility). Essentially, CAPM indicates that investors should receive higher returns for taking on higher risks. It also takes into account the risk-free rate of return, typically represented by government bonds, and the expected market return to provide a clearer picture of investment performance.