Why is the CAPM model important for investors?

The capital asset pricing model (CAPM) is a crucial tool for investors because it establishes a relationship between expected return and risk. Specifically, it calculates the expected return on an asset based on its systematic risk, as measured by the asset's beta. Through this model, investors can gauge whether an investment is worth the risk taken, essentially helping them make informed decisions about potential investments.

By using CAPM, investors can estimate the return they should expect for taking on additional risk over a risk-free rate, allowing them to compare different investment opportunities effectively. This risk-return tradeoff is fundamental in finance, as it helps investors decide where to allocate their capital based on their risk tolerance and investment goals.

The importance of this model in the investment community cannot be overstated, as it incorporates both market risk and expected returns systematically, enabling a more nuanced understanding of the risk inherent in various assets. Other options do not represent the main utility of the CAPM model, as it does not guarantee returns, calculate total market caps, or focus solely on past performances.