What is the capital asset pricing model (CAPM)?

The capital asset pricing model (CAPM) is indeed centered around the relationship between expected return and risk in the context of financial investments. It provides a framework that quantifies the expected return on an investment based on its risk compared to that of the overall market. This is achieved through the formula:

[ \text{Expected Return} = \text{Risk-Free Rate} + \beta \times (\text{Market Return} - \text{Risk-Free Rate}) ]

In this formula, the risk-free rate represents the return on an investment with no risk, such as government bonds, while beta measures the sensitivity of an asset's returns to the movements of the market. The CAPM is fundamental for investors as it helps them understand the risk-return trade-off and aids in making informed investment decisions.

The other options relate to different financial concepts: calculating inflation rates pertains to the measurement of price changes over time, assessing project feasibility usually involves techniques like net present value (NPV) or internal rate of return (IRR), and valuing fixed assets focuses on determining the worth of physical items like property or machinery. These concepts do not relate to the specific purpose and function of CAPM, which is to connect risk and expected return for individual