Final answer:
In the CAPM, the measure of risk is called beta, which measures a stock's volatility relative to the market. The risk-free rate is a baseline return for riskless investments, while the market risk premium is the additional expected return of a risky market portfolio.
Step-by-step explanation:
In the Capital Asset Pricing Model (CAPM), the measure of risk is called beta (c). Beta represents a stock's relative volatility or systematic risk compared to the overall market risk. The CAPM formula is used to calculate the expected return of an asset based on its beta and the expected market returns.
The risk-free rate (a) is the return on an investment with zero risk, serving as a baseline for the expected return of other investments. The market risk premium (b) is the additional return above the risk-free rate that investors expect from holding a risky market portfolio.