Capital Asset Pricing Model calculates expected return based on systematic risk (beta). The foundation of modern portfolio theory. Sharpe, Lintner won Nobel 1990.
E(Rᵢ) = Rf + βᵢ(E(Rₘ) - Rf)
// CAPM: Expected Return = Rf + Beta × Market Risk Premium
function capm(riskFreeRate, marketReturn, beta) {
const marketRiskPremium = marketReturn - riskFreeRate;
const expectedReturn = riskFreeRate + beta * marketRiskPremium;
return expectedReturn;
}
// Example: Rf=4%, Rm=10%, Beta=1.2
// ERP = 4% + 1.2 × (10% - 4%) = 4% + 7.2% = 11.2%