Capital Asset Pricing Model (CAPM)

The capital asset pricing model is a framework for estimating the expected return of an asset based on its sensitivity to overall market risk, measured by beta. Developed in the 1960s, with William Sharpe's 1964 paper as the standard reference, it states that expected return equals the risk-free rate plus beta multiplied by the market risk premium.

Why it matters

CAPM underlies how institutions set hurdle rates, price equity, and judge whether a manager's returns reflect skill or simply market exposure. Its central insight is that investors are only compensated for risk they cannot diversify away. Sharpe shared the 1990 Nobel Prize in economics for the work. The model's assumptions are heroic, and decades of evidence show beta alone does not fully explain returns, but it remains the default language of institutional risk.

In the gold vs bitcoin debate

Gold has historically shown a beta near zero to equities, which under CAPM implies a modest expected return but also explains its value as a diversifier: it adds little market risk to a portfolio. Bitcoin's beta has been unstable, at times exceeding 2 against technology stocks and at other times decoupling entirely. The allocation case for both assets rests on the same CAPM logic: an asset that improves portfolio returns without adding systematic risk earns its place.