Capital Asset Pricing Model (CAPM)

What this video covers

• Why CAPM only rewards systematic risk, and why unsystematic risk earns exactly zero premium because it can be diversified away
• How to build the CAPM formula: risk-free rate plus beta times the market risk premium, with the market return minus the risk-free rate subtraction performed before the beta multiplication
• What beta measures: systematic sensitivity where 1.0 equals market movement, greater than 1.0 amplifies moves, and less than 1.0 dampens volatility
• The exact exam trap between CAPM (beta, systematic risk) and the Sharpe ratio (standard deviation, total risk), and why mixing these measures costs points
• How to read the Security Market Line (SML): above the line means undervalued (buy), below means overvalued (sell or avoid), and on the line means fairly priced (hold)
• Why the market risk premium is always (market return minus risk-free rate), never the raw market return alone
• The core CAPM assumptions: rational investors, efficient markets, identical time horizons, and borrowing at the risk-free rate