capital asset pricing model

A model that shows the relationship between expected return and expected risk. CAPM shows that the return on an asset depends on 1) the time value of money (the total interest rate or return that can be earned on money over a period of time) 2) the reward for bearing systemic risk (the risks inherent in a market, such as the possibility of the stock market selling off) and 3) the amount of systemic risk. The risk is systemic because even if a stock is purchased and the company performs well, poor performance by a competitor in the same industry may mean that the entire market trades sharply lower. Because investors are risk-averse, they require higher rewards for higher risks.