The capital asset pricing model (CAPM) is a widely-used finance theory that establishes a linear relationship between the required return on an investment and risk. The model is based on the relationship between an asset's beta, the risk-free rate (typically the Treasury bill rate) and the equity risk premium (expected return on the market minus the risk-free rate). (See: "How To Calculate Beta Of A Private Company").

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At the heart of the model are its underlying assumptions, which many criticize as being unrealistic and might provide the basis for some of the major drawbacks of the model.


Source : Investopedia