A model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM states that the expected return of an asset equals the risk-free rate plus a risk premium based on the asset's beta (sensitivity to market movements).
Developed independently by William Sharpe, John Lintner, and Jan Mossin in the 1960s, building on Markowitz's portfolio theory. The name combines 'capital' from Latin 'capitalis' (relating to the head/chief) and 'asset pricing,' reflecting its focus on how risky assets should be valued.
CAPM is like a universal translator for risk and return - it says that every risky investment's expected return should equal the safe rate plus a risk premium that depends on how much it moves with the overall market! Despite being Nobel Prize-winning theory, CAPM often fails in practice because it assumes investors only care about beta risk, ignoring other factors like company size or value.
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