CAPM
By Jude Wallis
The capital asset pricing model, or CAPM, estimates a required return as the risk-free rate plus beta times the extra return expected from the market above that risk-free rate.
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Beta scales the market risk premium. A beta of 1 receives the full premium. Above 1 magnifies it. Below 1 reduces it. The risk-free rate is added once, after that scaling.
CAPM prices systematic risk, the part diversification does not remove. Company-specific surprises are treated as diversifiable, so they do not earn an extra expected return in this formula.
How the CAPM formula works is the explainer. The CAPM calculator applies the identity. Beta is the slope that does the scaling.