Which statement accurately describes the Capital Asset Pricing Model (CAPM)?

The Capital Asset Pricing Model (CAPM) is fundamentally concerned with the relationship between the expected return of an investment and its systematic risk, which is represented by beta. Beta is a measure that calculates how much a security's return is expected to change in relation to changes in market return. A beta of 1 indicates that the asset's price is expected to move with the market, while a beta greater than 1 indicates greater volatility compared to the market, and a beta less than 1 indicates less volatility.

In CAPM, the expected return on an asset is determined through the risk-free rate plus a risk premium that is based on the systematic risk captured by beta. This is why the statement about beta measuring an investment's risk relative to market performance is accurate.

Understanding this model is crucial for investors, as it helps in assessing whether an investment is offering a reasonable expected return for its level of risk compared to the overall market. This foundational aspect differentiates CAPM from other risk assessment models that may not account for market changes in the same comprehensive and systematic way.