Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is a fundamental financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks. It serves to estimate the return an investor should expect from an investment, given its risk compared to the market. In this formula, risk-free rate is the return of an investment with no risk of financial loss, beta measures the volatility or market risk of the investment compared to the market as a whole, and expected market return is the average return of the market. This model is widely used in finance for asset pricing and portfolio management, helping investors to make more informed decisions about where to place their investments.