CAPITAL ASSET PRICING MODEL(C.A.P.M.)

An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities . The C.A.P.M. asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The C.A.P.M. says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium .