What Is the Capital Asset Pricing Model (CAPM)?

By Jeremy Bowman – Updated Oct 8, 2025 at 3:22 AM EST

Key Points

CAPM calculates expected stock returns using the risk-free rate, stock beta, and market return.
The riskier the stock, the higher the return investors should demand.
CAPM aids in investment analysis but simplifies reality, not predicting exact returns.

There are a number of different financial models that investors can use to measure a rate of return.

The discounted cash flow model may be the best known, but the capital asset pricing model, also known as the CAPM, is another one of the more foundational financial models taught in business school.

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Stock charts showing volatility. — Image source: Getty Images.

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Discounted Cash Flow Model

The discounted cash flow model is used to value companies in the present based on expectations of future cash flows. The expected cash flows are discounted back to their values today.

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About the Author

Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.