Capital asset pricing model

The capital asset pricing model (CAPM) estimates an asset’s expected return from its risk-free rate, sensitivity to market movements, and the market’s expected return.

Security market line: A line relating expected asset returns to beta in the capital asset pricing model. It plots CAPM’s predicted return against each asset’s systematic risk.
Modern portfolio theory: A framework for choosing portfolios by balancing expected return against risk. CAPM extends portfolio theory’s account of how diversification shapes risk.
William F. Sharpe: An American economist who developed a prominent version of the capital asset pricing model. His 1964 formulation gave CAPM its influential equilibrium derivation.
Arbitrage pricing theory: An asset-pricing theory explaining expected returns through exposure to multiple systematic factors. It relaxes CAPM’s reliance on a single market-risk factor.
Beta (finance): A measure of an asset’s sensitivity to market movements. CAPM uses beta as its measure of systematic risk.
Efficient frontier: The set of portfolios offering the highest expected return for each level of risk. CAPM derives its market-equilibrium result from efficient portfolio choices.
John Lintner: An American economist whose work independently derived the capital asset pricing model. His 1965 analysis developed the same risk-return relation independently of Sharpe.
Fama–French three-factor model: An asset-pricing model adding size and value factors to market exposure. It addresses return patterns that CAPM’s single beta often fails to explain.
Risk-free rate: The theoretical return on an investment with no uncertainty about its outcome. It anchors the return CAPM predicts before adding compensation for market risk.
Market portfolio: A portfolio containing all risky assets, weighted by their market values. CAPM treats this portfolio as the common risky holding in equilibrium.

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