Capital Asset Pricing Model (CAPM)

The capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk.

CAPM - Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM), originated in the early to mid-1960s, was built upon the concept of modern portfolio theory and diversification.  The capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk.


The CAPM takes into account the following:

  • the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk);
  • the expected return of the market; and
  • the expected return of a theoretical risk-free asset.

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