Definition of Capital Asset Pricing Model

Capital Asset Pricing Model (CAPM): a stock valuation model that shows the relationship between expected returns and expected risk. It states that the return on an asset is equal to the risk-free return plus a risk premium, which is based on the stock's beta. This is an alternative model to the Arbitrage Pricing Theory (APT), which uses a stock's alpha as its basis. [1]

The idea that the risk related to a share, bond etc is related to the payments it produces. [2]

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