Published On:Tuesday, 3 January 2012
Posted by Muhammad Atif Saeed
The Capital Asset Pricing Model
CAPM tries to measure returns as a function of nondiversifiable risk. CAPM is one of the most eloquent financial models in existence. However it also has many problems. Notes on the development as well as the current state of CAPM.
Some of the problems associated with CAPM are:
Some of the problems associated with CAPM are:
Use of an historical beta to calculate Expected return. Must measure portfolio returns else will get firm specific events which is not what CAPM is concerned with.Fama and French (1992) found that Beta did not help explain return when size and market to book (book to market) were included in the pricing model.
Many Anomalies exist
