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.