The capital asset pricing model: expected return as a function of beta along the security market line.
The Capital Asset Pricing Model links an asset's expected return to its beta, its sensitivity to the market. This tool plots the security market line from the risk-free rate and the market risk premium, places assets by beta, and shows Jensen's alpha as the gap between an asset's expected return and the CAPM prediction.
E[R] = r_f + β (E[R_m] − r_f): the risk-free rate plus beta times the market risk premium.
The asset's expected return lies above the security market line, more than CAPM requires for its beta, so it plots as underpriced relative to the model.