The Capital Asset Pricing Model (CAPM) is a financial model that describes the relationship between risk and expected return of an investment. The model assumes that investors require a higher return for taking on higher levels of risk. It is used to calculate the expected return on a security or portfolio by taking into account the risk-free rate of return, the beta of the security, and the expected market return. The formula for CAPM is as follows:
Expected Return = Risk-Free Rate + Beta( Expected Market Return - Risk-Free Rate)
Capital Asset Pricing Model:
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