CAPM

A model in which an asset's expected return is the risk-free rate plus beta times the market risk premium. Only market exposure is rewarded.

Where you will meet it

CAPM comes up in 18 learning outcome notes across the FRM syllabus. A few of them:

• Commodity Forwards and Futures
  FRM Part I · Financial markets and products

  “Through CAPM, μ = r + β × (expected market return − r).”

• The Building Blocks of Risk Management
  FRM Part I · Foundations of risk management

  “Under the CAPM, and in a frictionless efficient-market framework generally, only systematic risk is priced, since it cannot be diversified away.”

• Risk Capital Attribution and Risk-Adjusted Performance Measurement
  FRM Part II · Operational risk and resilience

  “The CAPM then gives the hurdle as the risk-free rate plus beta times the market risk premium: Hurdle = Rf + β × (Rm − Rf).”

• Factor Theory
  FRM Part II · Risk management and investment management

  “In the CAPM, rf is the risk-free rate, Rm is the expected return on the market portfolio and β is the asset's beta.”

See also

Market risk · Risk premium · Risk-free rate

All terms beginning with C · FRM glossary

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