What does CAPM stand for?

The term CAPM stands for Capital Asset Pricing Model. This model is a vital tool in finance used to determine the expected return on an asset based on its systematic risk, which is quantified by beta. The CAPM establishes a relationship between the risk of a security and its expected return, guiding investors in evaluating the trade-off between risk and return.

The equation relies on several key components: the risk-free rate, the expected return of the market, and the asset's beta, measuring its volatility relative to the market. By using the CAPM, investors can make more informed decisions by understanding how much return they should expect for taking on additional risk compared to a risk-free investment. This model is particularly important in portfolio management and capital budgeting, serving as a foundation for various financial strategies.

The other options do not accurately define CAPM within the framework of finance, as they either present variations of the concept or incorrect terminology.