Final answer:
The Capital Asset Pricing Model (CAPM) predicts that, in equilibrium, every asset will have the same ratio of return to systematic risk.
Step-by-step explanation:
The Capital Asset Pricing Model (CAPM) predicts that, in equilibrium, every asset will have the same ratio of return to systematic risk. CAPM is a financial model that helps investors determine the expected return of an asset based on its risk level. It suggests that the only factor that determines an asset's expected return is its beta, which measures its sensitivity to systematic risk.
In simpler terms, CAPM assumes that investors are risk-averse and demand a higher return for bearing higher levels of systematic risk. Therefore, assets with higher beta (higher risk) are expected to offer higher returns, while assets with lower beta (lower risk) will have lower returns. This relationship ensures that every asset has the same ratio of return to systematic risk in equilibrium.