The Capital Asset Pricing Model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset that describes the relationship between the expected return and risk of investing in a security. A CAPM model shows that the expected return on a security is equal to the risk-free return plus a risk premium, which is based on the beta of that security. E(Ri) = Rf + βi * (E(Rm) - Rf), where: E(Ri) is the expected return on the capital asset (i), Rf is the risk-free rate of interest (e.g., government bonds), βi is the sensitivity of the expected excess asset returns to the expected excess market returns (i), E(Rm) is the expected return of the market.
Related Definitions in the Project: The Economic Reviews
