Capital asset pricing model meaning

In legal and regulatory practice, the capital asset pricing model (CAPM) is a financial model used to estimate an investment’s expected return or a company’s cost of equity for valuation, damages and investment decision-making. CAPM expresses expected return as: risk-free rate (commonly proxied by UK gilt or Irish sovereign yields) plus the equity market risk premium multiplied by beta, the asset’s sensitivity to movements in the broader equity market. The model assumes efficient markets, i.e. that market prices correctly reflect risk and return. CAPM is not defined in legislation or case law; it is a widely used descriptive tool. It commonly appears in expert evidence in shareholder, competition and commercial disputes, in M&A and fairness opinions, and in pensions investment advice. UK and Irish economic regulators (for example when setting WACC) frequently reference CAPM to estimate the cost of equity. Usage is broadly consistent across England & Wales, Scotland, Northern Ireland and Ireland. Key practical issues include selecting the risk-free rate, equity risk premium and beta, and any adjustments (for size, leverage, liquidity or country risk), which are often contested in negotiations, regulatory proceedings and litigation.