Capital Asset Pricing Model (CAPM)

The capital asset pricing model (CAPM) is a mathematical formula that attempts to establish a relationship between the systematic risk and expected return of an asset, mostly equities. Let’s use the CAPM to compute the expected return for a US-based stock using the following information: 10-Year Treasury yield: 1.5% Average annual return for US equities: 10% Beta for our chosen stock: 1.5 (i.e., the stock is 150% more volatile or risky than the overall US equities market) Based on the CAPM, the expected rate of return is 14.25%.