What Is Capital asset pricing model?
The Capital Asset Pricing Model (CAPM) relates an asset’s expected return to its beta, or sensitivity to the overall market. Expected return is the risk-free rate plus beta times the expected excess market return. Under CAPM, market risk is the compensated risk; return unexplained by that market exposure is called alpha.
Decades of research document violations of CAPM that motivate factor investing: the size and value premia, the momentum effect, and the low-beta anomaly behind BAB all earn returns CAPM cannot explain. Beta in CAPM is also what gets neutralised when a factor is beta-hedged.
Literature and references:
William F. Sharpe, Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance, 1964.
See also