# Capital asset pricing model

## Description

In finance, the capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset’s non-diversifiable risk. The model takes into account the asset’s sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset. Capital asset pricing model “suggests that an investor’s cost of equity capital is determined by beta.

Related formulas## Variables

E_{Ri} | The expected return on the capital asset (dimensionless) |

R_{f} | Risk free rate of interest (dimensionless) |

β_{i} | The sensitivity of the expected excess asset returns to the expected excess market returns (dimensionless) |

E_{Rm} | The expected return of the market (dimensionless) |