Write a short note on capital assets pricing model (CAPM).

The Capital Asset Pricing Model (CAPM) is a theoretical model that describes the relationship between the expected return of an asset and its systematic risk (beta). It states that the expected return of an asset is equal to the risk-free rate plus a risk premium, which is proportional to the asset's beta coefficient.

Mathematically, CAPM is expressed as: $$E(R_i)=R_f+{\beta }_i(E(R_m)-R_f)$$ where:

• $E(R_i)$ = Expected return of the asset
• $R_f$ = Risk-free rate (e.g., government bond yield)
• ${\beta }_i$ = Beta of the asset (measure of systematic risk)
• $E(R_m)$ = Expected return of the market

CAPM assumes investors are rational, markets are efficient, and all investors hold a diversified portfolio. It is widely used in finance to price risky securities and evaluate investment opportunities.