Capital Asset Pricing Model

In the landscape of Finance, the well-known Capital Asset Pricing Model (CAPM) stands as a prominent theoretical scheme that reshaped how risk and return are understood and assessed. This chapter traces its emergence analyzing its mathematical formulation, and unraveling its impact on portfolio management, asset valuation, and financial decision-making. It acknowledges CAPM’s elegance in translating risk to ‘beta,’ guiding diversification strategies and setting benchmarks for asset pricing. However, the chapter also recognizes its limitations and the perspectives that question its assumptions. The legacy of CAPM is one of transformation, offering a rational framework amid market complexities, while inviting further dialogue to refine and expand financial theories in pursuit of a more comprehensive understanding of investment dynamics.