The asset pricing models that this section of the study guide treats are born of modern portfolio theory. Though the test booklets during your exam will offer the formulas for reference, a knowledge of their construction is important to gain a better understanding of them and the significance of their input into the portfolio management process.
The Capital Asset Pricing Model (CAPM)
A cornerstone of modern portfolio theory, the capital asset pricing model attributes stock returns to the individual security's volatility, relative to the market and the volatility of the market itself. Investors have similar expectations concerning the risk/return relationship of risky assets, they can borrow and lend at the riskfree rate and transaction costs and taxes equal zero. The model could determine the portfolio on the efficient frontier that is the market portfolio. The CAPM formula reads as follows:
Exam Tips and Tricks E(r)=R_{f} + Î²(R_{m} R_{f}) where E(r) is the expected return; Î² is the volatility of the market and R_{m }is the return of the market. 
The Arbitrage Pricing Theory (APT)
In contrast to the CAPM, which explains stock returns as resulting from two variables, APT is a multifactor model, positing that stock returns are attributable to several factors, some of which are systematic, others industry specific and other still unique to a particular company. The formula is stated thus:
Exam Tips and Tricks R=a_{0} + b_{1}F_{1}+ b_{2}F_{2}...+b_{n}F_{n} + e where R=the security\'s return; a_{0}=the expected return; b_{n}=the sensitivity of the security to factor F_{n}=factors affecting the security (GDP, inflation). 

Investing
The Capital Asset Pricing (CAPM) Model: Pros and Cons
CAPM, while criticized for its unrealistic assumptions, provides a more useful outcome than either the DDM or WACC in many situations. 
Investing
The Capital Asset Pricing Model: an Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Investing
Valuation Models: Appleâ€™s Stock Analysis With CAPM
The capital asset pricing model, or the CAPM, estimates the expected return of an asset based on the systematic risk of the assetâ€™s return. 
Investing
Taking Shots At CAPM
Find out why many investors think the capital asset pricing model is full of holes. 
Investing
Is Apple's Stock Over Valued Or Undervalued?
Despite several drawbacks, the CAPM gives an overview of the level of return that investors should expect for bearing only systematic risk. Applying Apple, we get annual expected return of about ... 
Managing Wealth
Modern Portfolio Theory: Why It's Still Hip
Investors still follow an old set of principles that reduce risk and increase returns through diversification. 
Investing
Reduce Your Risk With ICAPM
Avoid unnecesary risks involved in CAPM calculations by also incorporating ICAPM into the mix. 
Investing
Introduction To International CAPM
ICAPM is one of several models used to determine the required return on an asset, discover its limitations and how to use it.