Capital Asset Pricing Model (CAPM)

The CAPM calculates the return investors should demand as compensation for a given level of risk. CAPM takes the risk-free rate (government debt yield) as its starting point, adds an equity market risk premium (i.e. the market return minus the risk-free rate) and multiplies that by a stock’s beta (i.e. its volatility relative to the market) to determine the return an investor should demand.