What does the Capital Asset Pricing Model (CAPM) analyze?

The Capital Asset Pricing Model (CAPM) focuses on determining the expected return of an investment based on its inherent risk in comparison to the overall market. Specifically, it analyzes the relationship between portfolio returns and market returns through the concept of systematic risk, represented by beta. CAPM posits that the expected return of a security is equal to the risk-free rate plus a risk premium, which is determined by the security’s beta and the expected market return.

This relationship is crucial for investors seeking to understand how their portfolio's returns are influenced by broader market fluctuations. By quantifying risk through beta, investors can make more informed decisions about asset allocation and risk management.

In contrast, the other options do not directly align with the primary focus of the CAPM. For instance, while interest rates, inflation, and investment strategies are important factors in investment analysis, they are not the central components of the CAPM framework. The model specifically emphasizes the risk-return tradeoff as seen through the lens of market returns, rather than these broader economic or strategic considerations.