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").


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