💼 Portfolio Management

CAPM Formula — Capital Asset Pricing Model Explained

The CAPM formula explained: expected return = risk-free rate + beta × market premium. Capital asset pricing model with examples and CFA Level 1 practice.

Key Concepts

Capital Market Line (CML)

CAL using the MARKET portfolio as the optimal risky portfolio. E(R) = R<sub>f</sub> + [(R<sub>m</sub>-R<sub>f</sub>)/σ<sub>m</sub>]σ<sub>p</sub>.

Systematic vs Unsystematic Risk

Systematic (market/non-diversifiable): β measures sensitivity. Unsystematic (company-specific): eliminated by diversification.

Premium +3 more

Free covers one Quants module. Premium opens all 10 subjects and 59 modules of CFA Level 1.

Formulas

From this module

CAPM / SML

E(Ri) = Rf + βi[E(Rm) - Rf]

Where: R<sub>f</sub> = risk-free, β = beta, E(R<sub>m</sub>)-R<sub>f</sub> = market risk premium

Beta

βi = Cov(Ri, Rm) / σ²m

Where: σ²<sub>m</sub> = variance of market returns

Premium +3 more

Free covers one Quants module. Premium opens all 10 subjects and 59 modules of CFA Level 1.

Master Formula Sheet -- Portfolio Management

Utility Function

U = E(R) - ½ × A × σ²

A = risk aversion (A>0: risk-averse)

CAL Equation

E(Rᶜ) = Rᶠ + [E(Rₚ)-Rᶠ]/σₚ × σᶜ

Slope = Sharpe ratio

Premium +6 more

80+ formulas from all 10 subjects in one place — edit and save your own version.

Decision Frameworks

Which performance measure to use?

Use when:

  • Sharpe: for well-diversified portfolios (total risk matters)
  • Treynor: for portfolios that are part of a larger diversified portfolio (β matters)
  • Jensen’s Alpha: for measuring active manager skill

Avoid when:

  • Sharpe for poorly diversified portfolios (total risk includes diversifiable risk)
  • Treynor when portfolio is the investor’s entire holdings

Test Your Understanding

R<sub>f</sub>=2%, β=1.2, Market return=9%. CAPM expected return:

Master this topic

Full cheat sheet, flashcards, mind map, and quiz for Portfolio Risk and Return: Part II.

Master Formula Sheet

All 80+ CFA Level 1 formulas in one searchable reference page.

Ready to study CAPM Formula — Capital Asset Pricing Model Explained?

Jump into the full module with cheat sheets, flashcards, mind maps, and practice questions.

Start Studying

No signup required. Create an account anytime to save progress.