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Finance
Capital Asset Pricing Model
A formula that calculates the expected return of an asset based on its risk compared to the overall market.
CAPM is one of the most famous models in finance. It says expected return = risk-free rate + beta × market risk premium. It helps investors understand how much extra return they should get for taking extra risk.
It's the formula that says 'the riskier the stock, the higher return investors should demand'.
Real world: A safe utility stock might have an expected return of 6%. A risky tech stock might need 15% expected return according to CAPM. Investors use this to decide if a stock is fairly priced.
💡 CAPM turns risk into a number you can use to price stocks.