The Capital Asset Pricing Model (CAPM) is a foundational financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks. The model states that: Expected Return = Risk-Free Rate + Beta × (Market Return – Risk-Free Rate). In Indian equity markets, the risk-free rate is typically approximated by the yield on 10-year Government of India securities, and the market return is the historical or expected return of the Nifty 50 index. Beta measures how sensitive a stock's returns are to overall market movements. CAPM is widely used in India for equity valuation (as an input to the discount rate in DCF models), portfolio construction, and performance attribution. While it has limitations — particularly its assumption of a single risk factor — it remains the most widely taught and referenced model for estimating the cost of equity capital in Indian corporate finance.
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