Capital Asset Pricing Model (CAPM)
Chapters in this video
- 0:00 Why CAPM matters for expected return
- 0:50 The three-step CAPM formula breakdown
- 2:01 Beta as the market volatility knob
- 3:13 Alpha: beating the expected return math
- 4:16 Total risk vs systematic risk and standard deviation
- 5:30 When R-squared breaks beta reliability
- 6:08 SML versus CML: the X-axis showdown
- 7:29 Rapid-fire exam recap
What this video covers
- How to calculate expected return using the CAPM formula: risk-free rate plus beta multiplied by the market risk premium
- Why CAPM only compensates for systematic risk and assumes unsystematic risk is fully diversified away
- How to interpret beta values above 1.0, equal to 1.0, between 0 and 1.0, equal to 0, and negative
- How to calculate alpha by subtracting CAPM expected return from actual return, not by subtracting market return from portfolio return
- When standard deviation (total risk) is the right measure instead of beta, including the 68-95-99.7 normal distribution rule
- Why R-squared below 0.70 makes beta unreliable and forces a switch to standard deviation
- The Security Market Line (SML) versus Capital Market Line (CML) distinction: beta on the X axis for everything, standard deviation on the X axis for efficient portfolios only
- Why plotting above the SML means undervalued (buy), not overvalued
Read the full lesson, free
This video's complete written lesson is free to read in the CertFuel app, no signup wall. The complete Series 65 course also includes adaptive practice questions and spaced-repetition flashcards, free through December 31, 2026.