Big Data and AI

  U nderstanding how assets are priced—and how risk is rewarded—is at the heart of modern finance. One of the most influential models that seeks to explain this relationship is the Capital Asset Pricing Model (CAPM) . Developed in the 1960s by William Sharpe , John Lintner , and Jan Mossin , CAPM is a cornerstone of financial economics and portfolio theory. It builds on Harry Markowitz’s Modern Portfolio Theory by introducing a precise, linear relationship between risk and expected return . Let’s explore CAPM in depth—its mechanics, assumptions, strengths, and weaknesses.  What Is CAPM? The Capital Asset Pricing Model describes how the expected return of a security is related to its systematic risk , as measured by a metric called beta (β) .  The CAPM Formula: E ( R i ) = R f + β i ( E ( R m ) − R f ) E(R_i) = R_f + \beta_i (E(R_m) - R_f) E ( R i ​ ) = R f ​ + β i ​ ( E ( R m ​ ) − R f ​ ) Where: E ( R i ) E(R_i) E ( R i ​ ) : Expected return of asset i R...