Describe the capital asset pricing model (CAPM).

The capital asset pricing model (CAPM) is indeed a framework that describes the relationship between systematic risk and expected return, which is integral to the pricing of risky securities. The model postulates that the expected return on an asset is proportional to its systematic risk, commonly measured by beta, which reflects how much the asset's returns move in relation to the overall market returns.

Investors use CAPM to determine the anticipated return of an investment given its risk relative to that of the market. This relationship underscores the importance of systematic risk—risk inherent to the entire market or market segment that cannot be mitigated through diversification—hence enhancing the understanding of how investments behave under varying market conditions and allowing for more informed investment decisions. The CAPM assumes that investors are rational and will demand a risk premium for taking on higher risk, which is reflected in the model's formulation.

The other options relate to aspects of investment theory and practice but do not capture the essence of CAPM. For instance, while the model does assist in forming a diversified portfolio, it is not solely a strategy for portfolio construction, nor does it focus on past performance or calculate future cash flows directly. The CAPM is more concerned with the ongoing relationship between risk and returns rather than historical