Capital Asset Pricing Model

The seminal theory proposed by William Sharpe (1963, 1964) with the Capital Asset Pricing Model (CAPM) states that a large portion of financial asset prices results from the broad market trend, namely the propensity of security prices to move together and at the same time. The residual part of financial asset prices depends consequently on the specific features peculiar to each financial asset or, at least, to each financial asset class a security can belong to. Of course, the residual part of asset prices is totally different and independent from the broad market trend.

This setting yields William Sharpe to propose a model pricing the expected asset return as a function of the risk free rate, the expected market risk premium and the strength of the link prevailing between the asset return and the broad market return