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A model that calculates an asset’s expected return by relating its risk (measured by beta) to the risk-free rate and the overall market return: r_m = r_f + β(r_m − r_f), where r_m = expected return of the market, β = volatility (risk), and r_f = the risk-free rate. This formula tells us that investors’ required return isn’t determined by risk alone, but also by the risk-free rate and the expected return on the overall market.

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