Asset Pricing Models in Modern Finance

This article explains the CAPM, which links an asset’s expected return to its beta—sensitivity to the overall market. It covers the security market line, the distinction between systematic and idiosyncratic risk, and why CAPM became finance’s cornerstone despite empirical failures, including the low-beta anomaly.

This article explores multi-factor models, from Fama-French’s size and value factors to Carhart’s momentum and newer quality/low-volatility factors. It explains how these models better capture cross-sectional stock returns, the empirical evidence against CAPM, and the rise of factor investing in quantitative finance.