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The CAPM is a model used to determine an investor’s “expected return”, or how much percentage profit a venture financier really should logically demand as a “fair” yield for putting money into a business enterprise.
To learn this, a different question could possibly be demanded: Just how much is is the logical “reasonable” percentage % return that a financier should probably receive if he invests in a company (with relatively high risk) versus putting his hard earned money in government bonds which might be assumed to be “risk free” and compared to putting his hard earned cash in the general share market assumed to offer “medium” risk?
Evidently, it’s entirely only “fair” that the investor receives a return superior in comparison with the government bond rate (due to the reason that the individual company carries larger risk). It’s in addition only reasonable that in fact he may want to expect a return larger than the generic share market yield, for the reason that the individual firm has bigger risk in comparison with the “medium risk” broad stock market. So just as before,what amount precisely should this investor reasonably earn as a lowest expected return?
It is here that the CAPM or Capital Asset Pricing Model comes in. The CAPM Formula places each one of these variables simultaneously: riskiness of the unique enterprise symbolized by its “beta”, riskiness of the general share market, interest rates a “risk free” government bond can render, among others… after which spits out an actual number that the investor “is deserving” to receive for investing his or her money into this “riskier” solitary firm.
This set percentage is named the “expected return”, because it can be the profit that he ought to “expect” or request to obtain if he invests his hard earned cash into a particular enterprise. This exact percentage is otherwise known as the “cost of equity”.

The CAPM Formula looks something like this:
Expected Return =
Govt. Bond Rate (Risk represented by “Beta”)(General Stock Market Return –Govt. Bond Rate)

Using this formula, we are able to find the theoretically exact rate of return the unique company investor should reasonably require for his or her funding, if the Capital Asset Pricing Model is to be believed.

Tags: capital asset pricing model, capm, capm formula, capm model, what is capital asset pricing model, what is capm