Capital Asset Pricing Model | Investor's Almanac

The Capital Asset Pricing Model (CAPM) provides a framework to calculate the expected return of an asset based on its systematic risk. Developed in the 1960s, CAPM posits that investors should be compensated for the time value of money and the risk they undertake. It quantifies this risk through beta (β), a measure of an asset's volatility relative to the overall market. By considering the risk-free rate, the market's expected return, and an asset's beta, CAPM offers a benchmark for evaluating investment opportunities and constructing diversified portfolios. Despite its theoretical elegance, CAPM has faced scrutiny and refinement over the decades, leading to alternative models that attempt to address its limitations and better capture real-world market dynamics.