Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) is a financial theory that describes the relationship between systematic risk and expected return for assets, particularly stocks. It is used to determine a theoretically appropriate required rate of return of an asset, given its risk relative to the market. The model assumes that investors hold diversified portfolios and only require compensation for systematic (non-diversifiable) risk.
Developers should learn CAPM when working in fintech, quantitative finance, or investment analysis applications, as it provides a foundational framework for pricing assets and assessing risk-adjusted returns. It is particularly useful for building portfolio optimization tools, risk management systems, or algorithmic trading platforms that require calculations of expected returns based on market data. Understanding CAPM helps in implementing financial models and integrating with economic data APIs.