Quant · Core
Capital Asset Pricing Model
CAPM says expected excess return is beta times the market risk premium — one factor, one line, many violations.
Definition
E[r] = r_f + β (E[r_m] − r_f). Assumptions include mean-variance investors and a mean-variance-efficient market portfolio. Empirically, size, value, momentum, and low-vol all object.
Why it matters
It is still the default cost-of-equity in corporate finance. Wrong in the cross-section, useful as a first hedge ratio.
Case
A low-vol stock with high realized return versus CAPM. The ‘alpha’ was the low-vol factor, not a secret cash flow.
How to read it
Use it as a language for beta. Then add the factors you actually believe. Do not price a project with a textbook 6% ERP without a reason.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Capital Asset PricesSharpe · 1964 · Journal of FinanceThe CAPM.
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