Capital asset pricing model

CAPM drastically simplified the computationally heavy mean-variance calculation requirements of Markowitz's original portfolio theory, delivering a simple, easy-to-apply formula for estimating fair required returns for individual stocks, corporate capital budgeting projects, and diversified investment portfolios. Its core beta risk metric that measures an asset's sensitivity to broad market moves is still a standard reporting metric used by asset managers globally to communicate portfolio risk characteristics to clients.

The original CAPM's strict theoretical assumptions — including perfectly efficient markets, zero transaction costs, and all investors having identical market expectations — rarely hold in real trading environments. This has led generations of researchers and practitioners to create adjusted extended versions of the model that add additional empirically observed risk factors such as company size, valuation ratio, and price momentum to improve return prediction accuracy.

The development of CAPM launched the entire modern field of empirical asset pricing research, spawning decades of peer-reviewed studies testing risk and return relationships across every major global public market and nearly every asset class. Its core conceptual insight that investors only earn an extra return premium for taking on unavoidable, non-diversifiable systematic risk remains one of the most widely taught and universally accepted core principles in all financial economics curricula.