CAPM Explained: Understanding Asset Returns and Risk

The Capital Asset Pricing Model (CAPM) is a financial model used to determine the expected return of an asset based on its systematic risk. It assumes that the expected return of an asset is equal to the risk-free rate plus a premium proportional to the asset's beta (systematic risk), which measures how much an asset's returns move in relation to the overall market. The CAPM is widely used in finance to determine the expected return on a range of assets, including stocks, bonds, and portfolios of assets. It is a cornerstone of modern portfolio theory and is extensively used by investors, analysts, and portfolio managers to make informed investment decisions.