The capital asset pricing model (CAPM) is used to determine the expected return on any asset. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systemic risk or market risk), beta (β), as well as the expected return of the market and the expected return of a theoretical risk-free asset.
This gives you the equation . From a direct interpolation, as beta increases the E[Ri] increases, and as beta decreases E[Ri] decreases.
When beta equals 1 then the asset moves diectly with the market. Thus, for every 1 increase in the market the asset will also increase by 1.
When beta >1 then the asset moves more than 1 for every 1 increase in the market.
When beta <1, the asset move in the opposite direction with the market. So, every 1 increase in the market the asset decreases by a factor of beta.
Also, Betai= Cov(Ri,Rm)/Var(Rm)
A downside of CAPM is that it assumes normal returns, and wouldn’t be effective today with great fluctuations in the market.
CAPM also influences the optimum portfolio, and the capital allocation line (CAL). These measure the optimum amount for you to invest in the asset under consideration and a fisk free asset.
Links:
http://en.wikipedia.org/wiki/Capital_Asset_Pricing_Model
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