Börsenlexikon: CAPM

A year after Bill Sharpe published his dissertation on portfolio theory, he introduced a broader concept he called the Capital Asset Pricing Model (CAPM). It was a direct extension of his one-factor model for constructing efficient portfolios. According to the Capital Asset Pricing Model, stocks carry two different risks. One risk is that a stock will trade on the stock market at all; this is what Sharpe called systemic risk. Systemic risk is beta and cannot be "diversified away." The second risk he called unsystematic risk; this is based on the economic position of a company. Unlike systemic risk, unsystematic risk can be diversified away by simply adding different stocks to a portfolio. In other words, the Capital Asset Pricing Model says that the market lies exactly on Markowitz's efficient frontier.