IGNOU BCOE 143 2026 2027 - What is the Capital Asset Pricing Model (CAPM)? Explain the conc

Question

What is the Capital Asset Pricing Model (CAPM)? Explain the concept of Arbitrage Pricing
Theory (APT) and differentiate it from CAPM.

05 Aug 2026

Answer :

Word Count : 548

The Capital Asset Pricing Model (CAPM) is a widely used financial model that explains the relationship between the expected return and systematic risk of an investment. It was developed mainly through the work of William Sharpe, John Lintner and others, building on Harry Markowitz’s portfolio theory. CAPM helps investors determine the return they should expect from an asset given the level of risk that cannot be eliminated through diversification. The basic formula of CAPM is: Expected Return = Risk-free Rate + Beta × (Market Return − Risk-free Rate) Here, the risk-free rate represents the return on an investment with negligible default risk, such as a government security. Beta measures the

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