The Security Market Line
How CAPM prices risk and what alpha really means
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The Central Question of Finance
- How much return should you expect for taking risk? If you buy a risky stock, you expect to earn more than the risk-free rate. But how much more?
- The Capital Asset Pricing Model (CAPM) answers this: your expected return should depend only on how much systematic risk you bear—risk that can't be diversified away.
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