Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model (CAPM) is a finance model that relates the expected return of an asset to its exposure to market risk, as measured by beta. It uses the risk-free rate and the expected market risk premium to estimate the required return for taking on that risk.
Example: Example: An analyst estimates a stock's expected return using CAPM with a beta of 1.1, a risk-free rate of 3.5%, and a market risk premium of 5%, yielding an expected return of 9.0%. This neutral example illustrates how beta and market conditions feed into the CAPM estimate.
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