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translateGLOSSARY · RISK MANAGEMENT

What is Capital Asset Pricing Model (CAPM)?

CAPM estimates the expected return of an asset based on its systematic risk (beta) relative to the market.

PrepClever Glossary · Risk Management

updateUpdated July 2026

Formula

Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate)

CAPM links risk and return: it says an investor should be compensated for the time value of money (the risk-free rate) plus the risk taken (beta times the market risk premium). It underpins the cost of equity used in valuation.

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Example

With a 6% risk-free rate, a beta of 1.2 and a 10% expected market return: Expected return = 6% + 1.2×(10%−6%) = 10.8%.

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Relevant NISM series

CFANISM Series XV

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FAQs about Capital Asset Pricing Model (CAPM)

What is the market risk premium?add

It is the extra return investors expect for holding the market portfolio over the risk-free rate — the (Market Return − Risk-Free Rate) term in CAPM.

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What is Capital Asset Pricing Model (CAPM)?

Related Terms

Beta

Alpha

Weighted Average Cost of Capital (WACC)

FAQs about Capital Asset Pricing Model (CAPM)

Where to go from here

Master every term that matters

What is Capital Asset Pricing Model (CAPM)?

Related Terms

Beta

Alpha

Weighted Average Cost of Capital (WACC)

FAQs about Capital Asset Pricing Model (CAPM)

Where to go from here

Master every term that matters