What is the significance of the Capital Asset Pricing Model (CAPM)?

• A. It helps in calculating a company's market share
• B. It determines the expected return based on systematic risk
• C. It estimates the company's sales revenue
• D. It calculates depreciation of assets

Answer: (B)

The significance of the Capital Asset Pricing Model (CAPM) lies in its ability to determine the expected return of an investment based on its systematic risk, which is measured by beta. CAPM establishes a relationship between the expected return of an asset and the risk-free rate, as well as the expected return of the market. This model is crucial for investors as it helps them make informed decisions about which investments provide adequate returns for the level of risk they are assuming. In essence, CAPM provides a framework for assessing whether an investment is worth the risk compared to the return it is expected to yield.

By understanding this relationship, investors can better gauge the trade-off between risk and return when constructing their portfolios, ultimately aiding in achieving their financial goals. The other choices do not capture the primary purpose or significance of CAPM; market share, sales revenue, and asset depreciation are not connected to the model's focus on risk and return.