Knowledge Base

CAPM — Capital Asset Pricing Model

ER = Rf + β(Rm − Rf)

CAPM estimates the expected return of an asset based on its risk relative to the market.

Rf = Risk-free rate (e.g., 10-year G-Sec yield). β = Beta (volatility vs market).

Equity Risk Premium (Rm − Rf) is the extra return investors demand for taking stock market risk.

A Beta > 1 means the stock is more volatile than the market (aggressive).

Used by professionals to determine the "hurdle rate" for investments.

Pro Tip

Use CAPM to see if a stock's recent returns justify its risk level. High beta stocks should provide significantly higher returns in bull markets.

CAPM — Capital Asset Pricing Model - Complete Guide

Everything you need to know about CAPM and how to optimize your financial strategy.

Understanding the Formula

The core calculation is based on:

ER = Rf + β(Rm − Rf)

Key Concepts & Rules

CAPM estimates the expected return of an asset based on its risk relative to the market.

Rf = Risk-free rate (e.g., 10-year G-Sec yield). β = Beta (volatility vs market).

Equity Risk Premium (Rm − Rf) is the extra return investors demand for taking stock market risk.

A Beta > 1 means the stock is more volatile than the market (aggressive).

Used by professionals to determine the "hurdle rate" for investments.

Expert Strategy

Use CAPM to see if a stock's recent returns justify its risk level. High beta stocks should provide significantly higher returns in bull markets.

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3. Check the breakdown table for year-by-year projections.
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