The Capital Asset Pricing Model (CAPM) and Recent Developments in the Area

Running head: STRATEGIC FINANCE
Strategic Finance
Name of the Student:
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Table of Contents
‘The Capital asset pricing model (CAPM) is a very useful model and it is used widely in the
industry even though it is based on very strong assumptions. Discuss in the light of recent
developments in the area.’..........................................................................................................2
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Conclusion:................................................................................................................................9
References and Bibliography:..................................................................................................10

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‘The Capital asset pricing model (CAPM) is a very useful model and it is used widely in
the industry even though it is based on very strong assumptions. Discuss in the light of
recent developments in the area.’
Introduction:
Capital Asset Pricing Model is considered to be only of the useful model, which
allows investors to detect risk and return from different stocks. However, the advantages and
disadvantage of Capital Asset pricing model is also for understanding the benefits, which can
be conducted by investors. Furthermore, the different usefulness of the Capital Asset pricing
model is disused, which directly allows the investors to select investments, which has higher
growth opportunity. Regardless of the assumptions used in Capital Asset pricing model the
output given from the equation allows investors to select stocks, which has future profits.
There is recent development in the area of Capital Asset pricing model strengthens the value
of output, which can improve financial performance of the portfolio. However, the
continuous use of Capital Asset Pricing Model is mainly conducted, due to its capability to
account for the systematic risk associated with a particular stock. On the other hand, the
model does not account for unsystematic risk, which is considered to be one of the major
flaws of Capital Asset Pricing Model. Hence, with further discussion adequate light on the
area can be portrayed.
Discussion:
Capital Asset pricing model has adequate credibility, where it is able to depict the
current return and risk for particular stock. Investors due to his popularity to account for
systematic risk rather than the unsystematic risk a particular stock relatively use CAPM
model. Moreover, the model actually uses beta to identify sensitivity of the stock and return

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that is to generate over the period, which are relatively helpful in depicting the investors cost
of equity. This determination of cost to equity relatively helps investors in making adequate
investment decision and creating a portfolio. Furthermore, Barberis et al. (2015) indicated
that with the help of the model security market line is relatively depicted for each particular
stock where the relationship between the risk and return are adequately analyzed. The works
of John Lintner, Jack Treynor, William Sharpe and Jan Mossin has mainly allowed us to
witness the CAPM model, which uses one factor in analyzing the expected return of the
stock. The model has allowed William Sharpe to attain the Nobel Prize in 1990 for the works
and contributions, which was made in CAPM. The achievements made after completing the
model relative allowed the contributor with undue criticism due to the presence of certain
limitations within the assumptions of the model. The criticisms mainly occur due to the
problems that were identified within the evaluation of CAPM model. There were many
extensions that were developed for supporting results of CAPM, which has relatively help in
depicting or more accurate expected returns of particular stock. However, Kuehn et al. (2017)
argued that the calculations that are conducted for the extension of CAPM relatively needs
extensive calculations and statistical analysis, which is far more complex than the underlying
model.
The main critic of Capital Asset pricing model was Richard Roll who directly charged
the founders of the model with empirical test, which where inefficient in detecting the
unobservable market Returns which, is used in the model. The critic also argued that the
CAPM formula is relatively similar to the mean variance efficiency testing method, where the
mean variance efficiency of a market is unobservable. The further criticism relatively came
from Fama and French who claimed that Capital Asset Pricing Model to be useless, as it did
not deliver the result for which it was developed. Fama and French also highlighted that the
Capital Asset pricing model relatively constitutes most of the market portfolio theory, which