Finance Definition
Capital Asset Pricing Model (CAPM)
📈 Investing
intermediate

Quick Definition

The Capital Asset Pricing Model (CAPM) is a financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks.

Formula

E(Ri) = Rf + Beta_i * (E(Rm) - Rf)

Examples

  • 1An investor uses CAPM to determine the expected return on a stock, considering its risk compared to the market.
  • 2A financial analyst applies CAPM to assess whether a stock is under or overvalued based on its beta and the expected market return.
  • 3Portfolio managers use CAPM to optimize the risk-return profile of their investment portfolios by selecting stocks that align with their risk tolerance.

Tags

CAPMriskreturninvestmentstocksmarket
Related Terms
Other terms you might find helpful
Beta
Beta is a measure of a stock's volatility in relation to the overall market.
Stock Market
The stock market is a collection of markets where stocks (shares of ownership in businesses) are bought, sold, and issued, reflecting the economic trends and the performance of companies.
Quick Info
Category:Investing
Difficulty:intermediate
Last Updated:6/18/2025