The CAPM is a formula used to determine the expected return on an investment by accounting for both the risk-free rate of return and the risk premium.
The market-risk premium is the additional return over a risk-free rate demanded by investors to compensate for the risk of holding a market portfolio instead of risk-free assets.
The risk premium represents the difference between the expected rate of return on an investment and the risk-free rate of return (such as those on government bonds) over the same period. It accounts for the compensation investors require to bear the additional risk associated with investment.
The risk-free rate or risk-free return represents the interest rate on the safest investments, such as federal government obligations. It is a fundamental component in financial models, particularly in assessing the required return on investments.
