Capital Asset Pricing Model, a financial model that calculates the expected return of an asset based on its systematic risk (beta) relative to the market. The formula is: Expected Return = Risk-free Rate + Beta × Market Risk Premium.
Acronym from Nobel Prize-winning theory developed by William Sharpe in 1960s. Combines 'capital' (Latin 'capitalis'), 'asset' (Old French 'assez'), 'pricing' (from 'price' via Latin 'pretium'), and 'model' (from Latin 'modulus' meaning measure).
CAPM revolutionized finance by proving that you can't get paid for risks you can diversify away - only systematic risk that affects the whole market matters! This is why a biotech stock might 'deserve' 15% returns while a utility stock only 'deserves' 8%, based purely on their sensitivity to market movements.
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