Capital asset pricing model (CAPM)
Also called: CAPM
The capital asset pricing model says an investment's expected return equals the risk-free rate plus its beta times the market's extra return over that rate.
CAPM is taught in every intro finance course. It holds that only market-wide (systematic) risk earns a reward, because company-specific risk can be diversified away.
Formula
Expected return = risk-free rate + β × (market return − risk-free rate)
Related terms
- Beta: Beta measures how much a stock tends to move compared with the whole market: a beta of 1 moves with the market, above 1 moves more, below 1 moves less.
- Risk-free rate: The risk-free rate is the return on an investment with no default risk, usually taken as the yield on short-term US Treasury bills.
- Diversification: Diversification is spreading money across many different investments so a loss on one has less effect on the whole portfolio.
Guides
Practise with $10,000 in play money
Free. No real money involved.
For learning only. This isn't financial advice.