The basic theory linking risk and return is the Capital Asset Pricing Model.

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The Capital Asset Pricing Model (CAPM) is a widely used theory that explains the relationship between risk and return in the financial markets. It states that the expected return on an investment is directly proportional to its systematic risk, also known as market risk, and that the higher the risk, the greater the potential reward. Therefore, by measuring the risk of an investment in relation to the market as a whole, investors can determine whether it offers a fair return for the level of risk taken.

The Basic Theory Linking Risk and Return Is the Capital