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The capital assets pricing model illustrates how risk is incorporated into user decision models

The capital assets pricing model illustrates how risk is incorporated into user decision models
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Capital Asset Pricing Model (CAPM)

CAPM explains the relationship between the expected return, Non-Diversifiable Risk (Systematic risk) and its valuation of securities.
CAPM believes that diversifiable risk of a security is reduced, when more and more securities are added to the portfolio.
Systematic risk is measures by Portfolio Beta.

Formula-
Expected return of the Portfolio =
Where,
Rf - Risk free rate of return
Rm- Expected return on Market Portfolio
Bp- Portfolio Beta

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