Final answer:
CAPM is a financial model used to determine the required return on an investment based on its risk. It is used to evaluate the attractiveness of investments and aid in portfolio management.
Step-by-step explanation:
CAPM, or the Capital Asset Pricing Model, is a financial model used to determine the required return on an investment based on its risk. It is widely used in finance and investments to estimate the expected return on an investment relative to its risk.
The CAPM consists of the risk-free rate, the market risk premium, and beta, which measures the stock's sensitivity to market movements. By using these inputs, the CAPM helps investors evaluate the attractiveness of different investment opportunities and make informed decisions.
In general, CAPM serves the purpose of valuing risky securities, determining the required return on investments, and aiding in portfolio management. In investments, the CAPM helps investors assess the expected return and risk of individual stocks or portfolios, allowing them to diversify their holdings and optimize their risk and return trade-off.