What is the Capital Asset Pricing Model (CAPM)?

"Capital Asset Pricing Model (CAPM)" is a theory that establishes a relationship between the expected return and the risk of an investment relative to the total stock market.

Within the CAPM, the risk of an individual share is divided into two components:

The 'specific' or 'non-systematic' risk, which is related to the company itself and can be eliminated through diversification.

The 'market risk' or 'systematic' risk, which arises from market-wide factors and cannot be diversified away.

This market risk is measured using the 'beta' factor, which indicates how sensitive a stock is to market movements.