CAPM

Capital Asset Pricing Model (CAPM) The capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, and it is related with a well-diversified portfolio. The CAPM formula is: ra = rrf + Ba (rm-rrf) where: rrf = the rate of return for a risk-free security rm = the broad market’s expected rate of return Ba = beta of the asset The model takes into account the asset’s sensitivity to