Capital asset pricing model I CAPM describes how prices of individual securities are determined ■ Portfolio theory. An asset's return is equal to the risk-free rate plus a risk premium equal to the asset's beta multiplied by the market risk premium a Linear relationship between return and riskCapital Asset Pricing Model ◼ CAPM describes how prices of individual securities are determined. ◼ Portfolio theory. ◼ An asset’s return is equal to the risk-free rate plus a risk premium equal to the asset’s beta multiplied by the market risk premium. ◼ Linear relationship between return and risk