The Capital Asset Pricing Model, or CAPM, is a financial formula used to determine the expected return on an investment based on its risk compared to the overall market. It helps investors understand how much return they should expect for taking on additional risk, using the concept of a risk-free rate and the investment's beta, which measures its volatility relative to the market. CAPM is widely used in finance for portfolio management and capital budgeting. By calculating the expected return, investors can make informed decisions about which assets to include in their portfolios, balancing potential returns against the risks involved.