The Capital Asset Pricing Model (CAPM) is a cornerstone of modern
finance, offering a clear method to evaluate the expected return of an
investment based on its risk.

Developed by William Sharpe in the 1960s,
CAPM provides a framework for understanding the relationship between risk
and return, crucial for making informed investment decisions.
CAPM calculates the expected return on an asset using the formula:

Expected Return= Risk-Free Rate + 𝛽×( Market Return − Risk- Free Rate)

Expected Return=Risk-Free Rate+β×(Market Return−Risk-Free Rate)

Here, the risk-free rate represents the return on a risk-free asset, such as
government bonds. Beta (𝛽) measures the asset’s sensitivity to market
movements, reflecting its risk relative to the market. The market return is the
overall return of the market.

CAPM helps investors assess whether an investment offers a fair return
given its risk level compared to the market. A higher beta indicates greater
risk and, therefore, a higher expected return to compensate for that risk. By
using CAPM, investors can make more informed decisions, balancing
potential returns with associated risks.

In essence, CAPM bridges the gap between risk and reward, guiding
investors in optimizing their portfolios.