Which model is commonly used to calculate the expected return on an asset?

The Capital Asset Pricing Model (CAPM) is widely recognized and utilized in finance for calculating the expected return on an asset, particularly for individual stocks or a portfolio of investments. The model establishes a linear relationship between the risk of an asset, represented by its beta, and its expected return, based on the risk-free rate of return and the expected market return.

CAPM is articulated through the formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). This equation emphasizes that an asset's expected return is influenced by the compensation for time value of money (the risk-free rate) and the risk associated with investing in that asset compared to the overall market.

The model is instrumental because it provides a systematic method for evaluating the trade-off between risk and return, which is fundamental in making investment decisions. Investors rely on CAPM to determine the appropriate required return on equity investments, assess project viability, and perform valuation analyses.

In contrast, the other options such as the Capital Allocation Performance Matrix, Comprehensive Asset Pricing Model, and Corporate Asset Performance Matrix are not widely established models in finance for calculating expected returns and do not have the same level of acceptance or application as CAPM.