Capital Asset Pricing Model
Definition
What is Capital Asset Pricing Model?
A model linking expected returnThe probability-weighted average of possible future returns or an estimate of future return. to the risk-free rateThe return assumed to be available from an investment with negligible default risk over a matching period., market risk premiumThe expected return of the broad market above the risk-free rate., and an asset's beta.
Example in practice
How This Looks in Practice
A higher-beta share receives a higher required returnThe minimum expected return an investor demands for the time and risk involved. under CAPM.
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Related Terms
Security Market Line
A line showing the CAPM relationship between expected return and beta.
Portfolio TheoryEfficient Frontier
The set of portfolios offering the highest expected return for each level of risk under stated assumptions.
Portfolio TheoryMinimum-Variance Portfolio
The portfolio with the lowest expected variance among the available combinations.
Fraud & ScamsPonzi Scheme
A fraud that pays earlier participants using money from newer participants rather than genuine investment profits.