How does the capital asset pricing model (CAPM) assist in finance?

The capital asset pricing model (CAPM) plays a crucial role in finance as it provides a framework for understanding the relationship between an investment's risk and its expected return. Specifically, CAPM helps investors determine the expected return on an asset by taking into account the asset's systematic risk, which is measured by its beta coefficient. This model reflects the rationale that investors need to be compensated for taking on additional risk beyond that of a risk-free investment.

By estimating expected returns based on the level of risk associated with a particular investment compared to the overall market, CAPM allows investors to make more informed decisions about whether an asset is worth the potential risks involved. As a result, it is a vital tool for portfolio management and capital allocation, ensuring that investors are focused on maximizing returns in relation to their risk tolerance.

The other choices do not capture the primary function of CAPM. While tax liabilities and historical performance evaluations are important in their own contexts, they do not pertain specifically to how CAPM aids in assessing expected returns based on risk. Similarly, determining market value pertains to a different aspect of financial analysis and management. Thus, the centrality of CAPM in estimating expected returns while considering risk is its most significant contribution to financial management.