What is the capital asset pricing model (CAPM)?

The capital asset pricing model (CAPM) is fundamentally a financial model that outlines the relationship between expected return and risk, specifically through the concepts of systematic risk and beta. The essence of CAPM is to demonstrate how the expected return on an investment is tied to its level of risk relative to the overall market.

In CAPM, the expected return on an asset is determined by the risk-free rate, the expected market return, and the asset's sensitivity to market movements, represented by beta. This relationship helps investors make informed decisions by allowing them to understand how much return they should expect for taking on additional risk compared to a risk-free investment.

The other options do not accurately represent the function or purpose of CAPM. The first choice discusses a connection to GDP growth, which is unrelated to how CAPM functions. The third choice refers to pricing fixed income securities, while CAPM specifically applies to equity investments and their relationship with market risk. Lastly, the fourth choice centers on assessing management quality, a different aspect of financial analysis that does not pertain to the CAPM framework. Thus, the correct conception of CAPM is indeed that it establishes a vital relationship between expected returns and risk, making option B the accurate answer.