Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) is a financial model used to determine the expected return on an asset based on its risk relative to the overall market. It evaluates the relationship between the risk-free rate, the asset's sensitivity to market movements (measured by beta), and the expected market return. The formula for CAPM is: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). This model helps investors understand the return they should expect for taking on additional risk and is widely used in portfolio management and asset pricing.
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