Capital asset pricing model

The capital asset pricing model (CAPM) gives required return as the risk-free rate plus beta times the market risk premium: r = rf + β(rm − rf). Only systematic risk is priced.

ByHoang TruongUpdated June 30, 2026

FrameworkCAPM

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A share with a beta of 1.4, a 3% risk-free rate and a 9% expected market return requires a return of r = 3% + 1.4 × (9% − 3%) = 3% + 8.4% = 11.4%. The capital asset pricing model splits required return into the risk-free rate plus a premium for systematic risk; unsystematic risk earns no premium because it diversifies away.

Where it fits

TopicRisk, Return & the CAPMCoreSubjectCorporate FinanceCore

The formula

LaTeX

r = r_f + \beta(r_m - r_f)

Variables

$r$: Required return on the asset (decimal)
$r_{f}$: Risk-free rate (decimal)
$β$: Beta — sensitivity to market movements (ratio)
$r_{m}$: Expected market return (decimal)
$(r_{m} - r_{f})$: Market risk premium (decimal)

Required return = risk-free rate + compensation for systematic risk.

Check yourself

PracticeCORE

Using the CAPM, calculate the required return on a share with a beta of 1.2. The risk-free rate is 2% and the expected market return is 8%.

Select an answer to check your understanding.