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A financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks.
CAPM states that expected return = risk-free rate + beta * (market return - risk-free rate). If the risk-free rate is 3%, the expected market return is 10%, and a stock has a beta of 1.2, the expected return would be 3% + 1.2 * (10% - 3%) = 11.4%. The model implies that the only risk that should be compensated is systematic (market) risk, since unsystematic risk can be diversified away. While widely used in corporate finance for cost-of-equity calculations, CAPM has been criticized for its simplifying assumptions.