Explanation

The CAPM (Capital Asset Pricing Model) is primarily used for estimating expected returns over multiple periods. Here's why:

CAPM Application:

• Option A (Correct): CAPM is specifically designed to estimate expected returns for assets over multiple periods based on their systematic risk (beta). The model provides a theoretical framework for determining the required rate of return for an asset given its risk relative to the market.

Why other options are incorrect:

• Option B: Assessing return performance against a benchmark is typically done using performance measurement metrics like Jensen's alpha, Sharpe ratio, or tracking error, not specifically the CAPM itself.
• Option C: Estimating expected returns using multiple investment factors is the domain of multi-factor models like the Fama-French three-factor model or other APT (Arbitrage Pricing Theory) models, not the single-factor CAPM.

Key CAPM Formula:

E(Ri) = Rf + βi × [E(Rm) - Rf]

E(Ri) = Rf + βi × [E(Rm) - Rf]

Where:

• E(Ri) = Expected return on asset i
• Rf = Risk-free rate
• βi = Beta of asset i (systematic risk)
• E(Rm) = Expected market return
• [E(Rm) - Rf] = Market risk premium

The CAPM's primary application is to estimate the required return for an asset given its systematic risk, which inherently involves considering returns over multiple periods rather than a single period.