What is the capital asset pricing model (CAPM)?

The capital asset pricing model (CAPM) is fundamentally a model that defines the relationship between systematic risk and expected return. It demonstrates how risk influences the expected return of an investment by incorporating a risk-free rate and a premium for the risk taken, which is based on the asset's sensitivity to market movements, known as beta. This method allows investors to assess whether an investment is providing an appropriate expected return relative to its inherent risk.

CAPM is integral in financial analysis and investment decisions as it helps in estimating the expected return on an asset based on its systematic risk, facilitating comparisons among varied investments. This conceptual framework aids in understanding how the market's volatility affects asset returns, thus influencing portfolio management strategies and capital budgeting decisions.

Other options mentioned do not accurately capture the essence of CAPM. For example, while some might view the model as applicable to stock valuation, it serves a broader purpose in risk-return relationships rather than focusing solely on stock prices. Similarly, CAPM is not an accounting tool, nor is it used for pricing consumer goods; instead, it is a foundational principle in the field of finance that is widely utilized for strategic investment analysis.