Capital Asset Pricing Model

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The Capital Asset Pricing Model (CAPM) is designed to predict expected returns on risky assets. CAPM involves using Beta (a measure of the asset's correlation to market returns) to calculate the expected return of a particular asset above the risk free rate, according to a significant list of simplifying assumptions.

The basis for the model was laid down by Harry Markowitz in his research on modern portfolio theory in 1952. CAPM was then developed over the next decade in a series of papers written by William Sharpe[1], John Lintner[2], and Jan Mossin[3].

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