Answer: Estimating expected returns over multiple periods

## Explanation The Capital Asset Pricing Model (CAPM) is primarily used for estimating expected returns over multiple periods. Here's why: **CAPM Formula:** 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 return on the market portfolio **Key Applications of CAPM:** 1. **Estimating expected returns** - The primary purpose of CAPM is to determine the appropriate required rate of return for an asset given its systematic risk (beta). 2. **Cost of equity calculation** - Used in corporate finance to estimate the cost of equity capital. 3. **Portfolio construction** - Helps in determining whether an asset is fairly valued relative to its risk. **Why other options are incorrect:** - **Option B (Assessing return performance against a benchmark)**: This is typically done using metrics like alpha (α) from the CAPM, but it's not the primary application. Performance assessment is more about evaluating actual returns vs. expected returns. - **Option C (Estimating expected returns using multiple investment factors)**: This describes multi-factor models like the Fama-French three-factor model, not the single-factor CAPM. **Correct Answer: A** - Estimating expected returns over multiple periods is indeed the most direct application of the CAPM framework.

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