CAPM. A formula relating risk to expected return that is used to price particularly risky securities. Often expressed as: R=Rf + b(Rm - Rf)

R=return Rf=risk-free return b=systematic risk (beta) Rm=expected return based on the market

The major component of this theory is that investors require additional expected return as incentive to assume additional risk. This additional incentive must also compensate investors for the money inaccessible to them during the time that it is invested. In other words, according to the CAPM, the expected return of a security or portfolio should equal the rate on a risk-free security plus a risk premium. Expressed as an inequality, if the expected return does not exceed the sum of the amount of risk the investment entails and the cost of investment in the security, then the investment is not worth pursuing.