What is the formula for expected return in CAPM?

The Capital Asset Pricing Model (CAPM) provides a framework for determining the expected return on an asset based on its systematic risk, represented by the beta (β) coefficient. The formula for expected return in CAPM is expressed as return equals the risk-free rate (Rf) plus the product of beta and the market risk premium (which is the difference between the expected market return, Rm, and the risk-free rate, Rf).

This formula captures the relationship between risk and expected return, indicating that investors require a higher return for taking on additional risk relative to a risk-free investment. The risk-free rate serves as a baseline for the minimum return investors expect, while the market risk premium accounts for the extra return expected from investing in the market over the risk-free rate, scaled by the investment's sensitivity to market movements (beta).

By utilizing this formula, investors can make informed decisions about portfolio allocation, evaluating whether the potential return justifies the assumed risk. The other options do not reflect the correct components or relationships established in CAPM, thereby helping to reinforce the understanding of the expected return formula.