Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model (CAPM) is a financial model that establishes a linear relationship between the expected return of an Asset and its systematic risk, represented by Beta (β). The formula is expressed as:

Expected Return (E(R)) = Risk-Free Rate (Rf) + Beta (β) * (Market Return (E(Rm)) – Risk-Free Rate (Rf))

Where:

• Risk-Free Rate (Rf): The return on an investment with zero risk, typically represented by government Bonds.
• Beta (β): A measure of an Asset’s volatility in relation to the market