What does the Capital Asset Pricing Model (CAPM) relate to?

The Capital Asset Pricing Model (CAPM) is a fundamental equation in finance that establishes a linear relationship between the expected return on an investment and its systematic risk, often measured by beta. Systematic risk refers to the inherent risk that affects the entire market or a segment of the market, which cannot be eliminated through diversification. CAPM posits that the expected return on a security is equal to the risk-free rate plus a risk premium that is proportional to the systematic risk of that security. Thus, investors can use CAPM to assess whether an investment offers an adequate expected return given its level of risk.

This relationship is crucial for investors and portfolio managers as it helps them understand how much additional return they should demand for taking on additional risk. In contrast, the other options mentioned relate to different aspects of finance. The calculation of total assets and liabilities concerns balance sheet fundamentals, dividend payouts deals with income distribution policies, and market capitalization valuation often involves other financial metrics rather than directly linking expected return to risk.