Which aspect of CAPM considers systematic risk?

The Capital Asset Pricing Model (CAPM) is a widely used finance theory that establishes a linear relationship between systematic risk and expected return for assets, particularly stocks. The model essentially explains how investors can expect to be compensated for taking on additional risk compared to a risk-free asset.

The aspect of CAPM that focuses on systematic risk is the determination of beta. Beta is a coefficient that measures the sensitivity of an asset's returns to the overall market returns. It quantifies how much the asset's price is expected to change in relation to a change in market return, specifically reflecting the asset's systematic risk, which is the risk inherent to the entire market or market segment. A beta of 1 indicates that the asset's price moves with the market, while a beta greater than 1 indicates greater volatility than the market, and a beta less than 1 suggests less volatility.

In this context, other aspects such as market return estimation, calculation of visible returns, and estimation of risk-free return do not directly measure or account for systematic risk. Instead, these elements are components of the overall CAPM framework that serve different purposes in the investment evaluation process. Therefore, the calculation of beta is the central focus when understanding how CAPM incorporates systematic risk into its calculations