Portfolio evaluation using capital asset pricing model

The Capital Asset Pricing Model (CAPM) is used to determine a theoretically appropriate, required rate of return for an asset, if that asset is to be added to an already well-diversified portfolio, given that assets have non-diversifiable risk. The model takes into account the asset's sensitivity to systematic risk, often represented by the quantity, beta, and the expected return of a theoretical risk-free asset. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).