Single-factor model
The workbook's own term for CAPM: a model that explains an asset's return using just one risk factor, market risk, unlike the several factors used in APT and other multifactor models.
In plain language
Some models explain return with one driver. Others use several. The workbook draws this line at the start of its multifactor discussion.
CAPM is a single-factor model. It picks one risk factor — the market — and measures how sensitive a stock is to it, through beta. That single number, put into the CAPM formula, gives the stock's expected return.
This is exactly why Arbitrage Pricing Theory and other multifactor models exist. They capture return drivers that CAPM's single factor cannot, such as inflation surprises or growth in GNP.
How it works
The workbook states it directly (section 16.11): "CAPM is a single factor (Market Risk) model. It has designated a single risk factor to account for the variability in the return of an investment."
The workbook's own worked CAPM example shows the single factor at work. With a risk-free rate of 8%, a stock beta of 1.5, and a market risk premium (Rm − Rf) of 14%, the expected return is:
Rf + (Beta × (Rm − Rf)) = 8% + (1.5 × 14%) = 29%
Every input in that formula ties back to one factor: the market. There is no second beta and no second risk premium. Multifactor models such as APT replace this single beta with several betas, one per chosen factor.
The formula
Single-factor (CAPM): E(R) = Rf + β × (Rm − Rf)
Multifactor (APT-style): R = a + b1F1 + b2F2 + … + bnFn + ε
A worked example
Following the workbook's own CAPM figures. An analyst values a mid-cap NBFC stock using the single-factor (CAPM) model. Risk-free rate 8%, stock beta 1.5, market risk premium 14%.
Expected return = 8% + (1.5 × 14%) = 29%
On a Rs 10,00,000 holding, the single-factor model implies an expected gain of about Rs 2,90,000 over the year, driven entirely by the stock's sensitivity to the market. A multifactor analyst might instead attribute part of that stock's return to a separate interest-rate factor and a separate inflation factor. The single-factor model is blind to both — it has only the one lever, market beta, to explain the whole 29%.
Why NISM asks about it
Chapter 16 (Introduction to Capital Market Theory), section 16.11 (Multi factor models of risk and return), opens by naming CAPM a single-factor model before introducing APT as the multifactor alternative. Expect a question asking how many factors or betas CAPM uses, or naming CAPM and APT and asking which is single-factor and which is multifactor.
Common exam traps
- CAPM = single factor (market risk, via beta). APT = multifactor (several betas, one per factor). This exact contrast is the workbook's own framing and a natural true/false question.
- The single factor in CAPM is market risk specifically — not any other single variable.
- Do not confuse this with the Factor model page, which covers the workbook's multi-factor models (macroeconomic, fundamental, statistical) from Chapter 18. Single-factor model is the opposite end of that same spectrum, named in Chapter 16 as CAPM's own classification.
Where this is taught
Free preparation for NISM Series XXI-BRelated terms
- BetaHow sharply a share moves relative to the market index — beta 1 moves with the index, above 1 amplifies it, below 1 dampens it. The standard measure of systematic risk.
- CAPMA model that prices the return an investor should demand from a share: the risk-free rate plus beta times the market risk premium.
- Systematic riskThe part of an investment's risk that comes from economy-wide forces moving every asset at once — it cannot be diversified away, and it is the only risk the market pays you to carry.
- Arbitrage Pricing TheoryA multifactor alternative to CAPM, developed by Stephen Ross, in which expected return depends on several risk factors — each with its own beta — instead of the market alone.
- Factor modelA model that explains a security's or portfolio's return through its sensitivity to chosen factors — macroeconomic, fundamental or statistical — rather than through a single market beta alone.