What is the capital asset pricing model used for?

The capital asset pricing model (CAPM) is a financial model used to determine an investment’s expected return based specifically on its systematic risk, which is the risk inherent to the entire market or market segment. The model incorporates the risk-free rate, the expected return of the market, and the investment's beta coefficient, which measures its sensitivity to market movements. By using these components, investors can estimate the return they should expect for taking on additional risk, which is particularly useful when comparing various investment opportunities.

Understanding the relationship between risk and return is central to making informed investment decisions. CAPM allows for a systematic way to quantify the risk-return trade-off, helping investors determine whether a security is fairly valued in relation to its risk. This makes it an essential tool in portfolio management and valuation.

Other choices such as assessing a company's profitability, forecasting future stock prices, or evaluating market efficiency do not directly relate to the uses of CAPM. Each of these areas pertains to different financial analysis techniques and concepts, but they do not focus on the calculation of expected returns based specifically on risk, which is the core purpose of the capital asset pricing model.