Cognitive Scaffold

Preparing your thinking workspace

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MENTAL MODEL · M3572

CAPM

CAPM
DecideHigh supportDecision Science
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

Expected return = Risk-free rate + Beta * (Market return - Risk-free rate). The core idea is that high returns on an investment are merely compensation for bearing systematic (non-diversifiable) risk.

SCAFFOLDING EFFECT

psychology

Reduce cognitive load

Risk pricing. Do not believe in "low risk, high return." If a project offers high returns, there must be risks you haven't seen (Beta). Use the CAPM model to reverse-engineer where the hidden risk lies.

anchor

Anchor fast decisions

The Capital Asset Pricing Model (CAPM) states that an asset's expected return is solely compensated for systematic risk (β): E(r) = r_f + β(E(r_m) - r_f). It prices market risk that cannot be diversified away as the core variable.

MINIMUM ACTION

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Practice this model in one real situation:

Check to track your progress (stored locally)
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Source support: Explicit

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