What financial model incorporates Risk-Free Rate and Beta as components?

The Capital Asset Pricing Model (CAPM) is the financial model that incorporates both the Risk-Free Rate and Beta as key components. CAPM is foundational in finance for determining the expected return on an investment based on its risk relative to the market.

The Risk-Free Rate in CAPM represents the return on an investment with no risk, often associated with government securities like Treasury bonds. This rate serves as the baseline return that investors would expect for taking on the risk of investing in riskier assets.

Beta measures the sensitivity of an asset's returns in relation to the overall market returns. It quantifies the systematic risk of the asset, indicating how much the asset's price might fluctuate compared to market movements. By incorporating Beta, CAPM allows investors to assess how much risk they are taking relative to the market and, consequently, what return they should expect in compensation for that risk.

The combination of the Risk-Free Rate and Beta within the CAPM framework provides a systematic way to evaluate the expected return on equity investments, thus guiding investment decisions and helping in assessing the adequacy of an asset's returns relative to its risk.