CAPM

The capital asset pricing model (CAPM) is an equilibrium theory that relates the expected return of an asset to its market risk.

It can be calculated as follows:

k = rf + ( β x ( rm - rf ) )

where k is the expected return, rf is the risk-free rate, β is the beta of the asset and rm is the expected return on the market.

The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.