The Capital Asset Pricing Model (CAPM) shows the relationship between the required or expected return on equity and risk of investing in the same. It is integral to calculating the weighted average cost of capital WACC (which is used extensively in financial modeling), as it computes the cost of equity and is important for the purpose of valuation in corporate finance.

The Efficient Market Hypothesis (EMH) is a theory that explores the relationship between the availability of information and asset prices. It argues that all available information is already reflected in the price of a stock (i.e. assets are trading at their fair value) and therefore it is impossible to beat the market over the long-term. The theory is closely associated with Eugene Fama, who explored three different forms of market efficiency – weak, semi-strong and strong. It also supports the case for passive investing in more efficient areas of the market since finding opportunities with potential upside in excess of the market are considered as non-existing.

Goals based investing measures success against investor’s objectives instead of a traditional benchmark. For example, if an investor is approaching retirement in two to three years, he or she may now be risk averse and unwilling to lose even a small fraction of their portfolio. Even if the market declines by 25% and the investor’s portfolio is down “only” 15%, that would barely bring any comfort to the investor. Therefore, to mitigate risk the majority of asset should be invested in cash, and a small proportion in lower risk securities such as fixed income.