▁asset ' s ▁sens itivity ▁to ▁non - d ivers ifiable ▁risk ▁( also ▁known ▁as ▁system atic ▁risk ▁or ▁market ▁risk ), ▁often ▁represented ▁by ▁the ▁quantity ▁beta ▁( β ) ▁in ▁the ▁financial ▁industry , ▁as ▁well ▁as ▁the ▁expected ▁return ▁of ▁the ▁market ▁and ▁the ▁expected ▁return ▁of ▁a ▁theoretical ▁risk - free ▁asset . ▁C AP M ▁assumes ▁a ▁particular ▁form ▁of ▁utility ▁functions ▁( in ▁which ▁only ▁first ▁and ▁second ▁moments ▁matter , ▁that ▁is ▁risk ▁is ▁measured ▁by ▁variance , ▁for ▁example ▁a ▁quadratic ▁utility ) ▁or ▁altern atively ▁asset ▁returns ▁whose ▁probability ▁distributions ▁are ▁completely ▁described ▁by ▁the ▁first ▁two ▁moments ▁( for ▁example , ▁the ▁normal ▁distribution ) ▁and ▁zero ▁transaction ▁costs ▁( necess ary ▁for ▁divers ification ▁to ▁get ▁rid ▁of ▁all ▁id ios ync r atic ▁risk ). ▁Under ▁these ▁conditions , ▁C AP M ▁shows ▁that ▁the ▁cost ▁of ▁equ ity ▁capital ▁is ▁determined ▁only ▁by ▁beta . ▁Despite ▁it ▁failing ▁numerous ▁empir ical ▁tests , ▁and ▁the ▁existence ▁of ▁more ▁modern ▁approaches ▁to ▁asset ▁pr icing ▁and ▁port folio ▁selection ▁( such ▁as ▁ar bit rage ▁pr icing ▁theory ▁and ▁M erton ' s ▁port folio ▁problem ), ▁the ▁C AP M ▁still ▁remains ▁popular ▁due ▁to ▁its ▁simplicity ▁and ▁utility ▁in ▁a ▁variety ▁of ▁situations . ▁ ▁In vent ors ▁The ▁C AP M ▁was ▁introduced ▁by ▁Jack ▁Tre yn or ▁( 1 9 6 1 , ▁ 1 9 6 2 ), ▁William ▁F . ▁Sh ar pe ▁(