Capital asset pricing model

CAPM expresses required return as Rf + beta × (Rm − Rf), where Rm − Rf is the market risk premium. For shares, use an equity beta to estimate cost of equity. The model prices systematic risk because diversified investors can reduce company-specific risk. Its assumptions include an idealised market and investors holding efficient portfolios; real inputs such as beta, the risk-free proxy and the risk premium require judgement. CAPM estimates an expected or required return, not a guaranteed realised return or a mechanical forecast of every share-price change.