Capital asset pricing model
A model linking an asset's required return to its sensitivity to the market: the risk-free rate plus beta times the equity risk premium.
Formula
The risk-free rate, beta as sensitivity to the market, and the equity risk premium. All inputs are annual, in one currency and expressed as fractions of one.
How to read the number
It asserts that only the risk which diversification cannot remove is rewarded.
When the metric lies
Also known as: capm