Which statement best defines the capital asset pricing model (CAPM)?

The capital asset pricing model (CAPM) is fundamentally focused on estimating the expected return of an investment based on its systematic risk, which is represented by beta. Beta measures the sensitivity of an investment's returns to the overall market returns. The CAPM formula articulates that an investor should be compensated for both the time value of money and the risk taken by investing in a particular asset. This makes it essential for investors to understand the relationship between risk and expected returns.

The underlying philosophy of CAPM posits that there is a direct correlation between the level of risk and the expected return; higher risk investments should yield higher potential returns to compensate investors for taking on that additional risk. This framework is crucial for making informed investment decisions and portfolio management.

In contrast, the other options do not accurately capture the essence of the CAPM. While assessing market volatility relates to understanding risk, it does not define the CAPM’s specific use of systematic risk to estimate expected returns. Predicting economic growth and evaluating company performance pertains to broader economic or operational analyses and are not the focus of the CAPM, which is strictly concerned with returns on investments in relation to risks taken.