The world of finance is built on the bedrock of various theories and models that guide investors in making informed decisions. One such model, the Capital Asset Pricing Model (CAPM), plays a significant role in determining the expected returns on investments and assessing the relationship between risk and reward. In this article, we will explore the key principles and components of CAPM and its importance in financial decision-making. The Capital Asset Pricing Model, commonly known as CAPM, is a financial model developed by William Sharpe in the 1960s. It’s designed to provide a framework for calculating the expected return on an investment based on its risk and the broader financial market. CAPM offers a fundamental insight: the expected return on an investment should be directly linked to its systematic risk, also known as beta. Key Components of CAPM 1. Risk-Free Rate (Rf) The CAPM model begins with the assumption that there is a risk-free rate of return available to investors. This is typically represented by the yield on government bonds, such as U.S. Treasury bonds. It serves as the baseline return an investor could earn