What does the capital asset pricing model (CAPM) calculate?

The capital asset pricing model (CAPM) is primarily used to determine the expected return on an investment based on its systematic risk, which is represented by its beta coefficient. Systematic risk refers to the inherent risk that affects the overall market or a large portion of the market, and it cannot be eliminated through diversification.

CAPM provides a formula that connects the expected return of an asset to its risk compared to that of the market as a whole. According to CAPM, the expected return on an investment is equal to the risk-free rate plus a risk premium, which is derived from the asset's beta and the market risk premium. This relationship is vital for investors as it aids them in making informed decisions about the trade-off between risk and return for potential investments.

While the other options present valuable financial metrics, none are directly related to CAPM's function:

• The total value of a company’s assets pertains to its balance sheet and is not concerned with the return on individual assets.
• Economic profit focuses on the additional profit beyond normal profitability, which is not specifically tied to the expected return on risky assets.
• The amount of dividends paid to shareholders is related to cash distributions and does not factor in the risk aspects considered in CAPM.

Thus, option