Beta, Alpha, and the CAPM
Sharpe 1964 — the part of risk that the market actually pays you for, and the half-century of evidence that complicates the story
When William Sharpe published 'Capital Asset Prices' in the Journal of Finance in September 1964, he answered a question that Markowitz's framework had left open. Markowitz had shown that diversification reduces variance until you hit a floor of systematic, undiversifiable risk. Sharpe's question was: if every rational investor diversifies to that floor, what determines the return premium an investor earns for bearing that floor's worth of remaining risk?
His answer became known as the Capital Asset Pricing Model — the CAPM — and it gave finance two of its most-used words: beta, the systematic-risk exposure of an asset to the market, and alpha, the excess return above what beta predicts. The model's structural elegance is striking: a single number (beta) summarizes an asset's contribution to a diversified portfolio's risk, and a single equation determines its required return. The empirical record is more complicated.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 8 sections and ends with 6 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1Beta — the systematic-risk number
- 2Alpha — what's left after beta is accounted for
- 3CAPM Beta and Alpha Visualizer
- 4CAPM in regression form
- 5CAPM expected returns at different betas (rf=4%, ERP=5%)
- 6The low-beta anomaly — when CAPM predicts the wrong direction
- 7Where to see this on the platform
- 8Summary