Chapter 7 introduced risk and risk measurement and showed us how diversification enables an investor to reduce risk. Of course, there is a limit to risk reduction and only risk unique to individual securities can be diversified away. The risk that a security bears as part of the overall economic system remains in the portfolio. This risk was termed market risk. A fully diversified portfolio will have only market risk. This chapter builds on the lessons of chapter 7 and presents formal models linking risk and expected return. The chapter begins with a discussion on portfolio theory pioneered by Harry Markowitz. This theory formed the basis for the most popular and widely used model of risk-return relationship: the Capital Asset Pricing Model or CAPM. The CAPM has some empirical evidence to support the basic conclusions derived from the model. Recently, it has been challenged by other theories that purport to rely on assumptions less restrictive than the ones used by CAPM. The chapter presents three alternate theories to CAPM. While CAPM is far from perfect, it remains the most widely accepted model, primarily because of its relative simplicity and ease of application.