What is the capital asset pricing model (CAPM) used for?

The capital asset pricing model (CAPM) is fundamentally utilized to establish the relationship between expected return and risk. It provides a framework for understanding how the expected return on an investment is influenced by its risk relative to the market as a whole. This is achieved through the introduction of the concept of systematic risk, represented by beta, which measures the sensitivity of the asset's returns to the overall market returns.

By using CAPM, investors can determine a theoretically appropriate required rate of return on an asset, factoring in risk. This is significant because it enables investors to make informed decisions regarding which assets to include in their portfolios, aligning the potential expected returns with the associated risks.

In contrast, while some options may touch upon aspects of investment analysis, they do not directly pertain to the specific purpose of CAPM as it focuses explicitly on the relationship of risk versus return. Evaluating a firm's financial stability or determining fluctuations in stock prices are broader analyses that may incorporate CAPM but fall outside its primary scope. Similarly, projecting future market trends is a more complex endeavor that presents a wider range of variables and methodologies not specifically addressed by CAPM.