CAPM Expected ReturnView Financial Glossary Index
Capital Asset Pricing Model (CAPM) was introduced by Jack Treynor, William Sharpe, and John Litner independently building on work done by Harry Markowtiz's efficiency frontier theories.
The CAPM is a measure of the relationship between risk and expected return of a security. The idea is that an investor should be compensated by the amount of risk he/she takes on, in addition to the expected market return.
CAPM Expected Return = Annualized Expected Market Return x Company's 60 Month Market Beta
The Annualized Expected Market Return is calculated by taking the historical average of the Fama-French Monthly Market Benchmark withholding the prior 12 months, and annualizing this average.