The capital asset pricing model (CAPM) is a financial modeling technique used

to calculate the expected return on an asset. It is one of the most widely used
financial models in the world, and it is used by investors, analysts, and
companies to make informed investment decisions.

The CAPM is based on the idea that the expected return on an asset is equal to
its risk-free rate plus a risk premium. The risk premium is the amount of extra
return that investors demand for taking on additional risk.

The following formula is used to calculate the CAPM:

Expected return = Risk-free rate + Beta * (Market return - Risk-free rate)

where:

Expected return is the expected return on the asset.

Risk-free rate is the return on an investment that is considered to be risk-free,
such as a US Treasury bill.
Beta is the asset's beta, which is a measure of its volatility relative to the market.
Market return is the expected return on the market, which is typically
represented by a stock market index such as the S&P 500.
To calculate the CAPM in financial modeling, companies typically use the
following steps:

Estimate the risk-free rate. The risk-free rate can be found by looking at the
yield on US Treasury bills.
Calculate the asset's beta. The asset's beta can be calculated using a number of
different methods, such as the historical beta method or the implied beta
method.
Estimate the market return. The market return can be estimated by looking at
the expected return on a stock market index such as the S&P 500.
Once the risk-free rate, beta, and market return have been estimated, the
expected return on the asset can be calculated using the CAPM formula.

The CAPM is a valuable tool for financial modeling because it provides a

simple and straightforward way to calculate the expected return on an asset.
However, it is important to note that the CAPM is a simplification of the real
world, and it does not take into account all of the factors that can affect an
asset's return. As such, it is important to use the CAPM in conjunction with
other financial modeling techniques to get a complete picture of an asset's risk
and return potential.