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Expected return of a risky asset

The Capital Asset Pricing Model gives the expected return of an asset as the risk-free rate plus the asset's beta times the market risk premium. It is used to estimate the required return on an investment given its systematic risk.

E(R_i)=R_f+\beta_i\left(E(R_m)-R_f\right)

What the symbols mean

expected return of asset i
risk-free rate of return
beta of asset i, its sensitivity to market movements (dimensionless)
expected return of the market portfolio

About this formula

  • FieldEconomics and finance
  • TopicAsset pricing
  • LevelUniversity
  • Also calledCAPM, capital asset pricing model, expected return CAPM formula, security market line, required return on equity, beta expected return

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