CAPM = Rf + B (Rm-Rf) Rf = Risk Free rate
B = Beta
Rm = Market risk
The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for the pricing of risky securities, generating
expected returns for assets given the risk of those assets, and calculating costs of capital. The CAPM model says that the expected return of a security or a portfolio equals the rate on a risk free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).
