Capm
The Capital Asset Pricing Model commonly known as CAPM defines the relationship between risk and the return for individual securities. CAPM was first published by William Sharpe in 1964. CAPM extended “Harry Markowitz’s portfolio theory” to include the notions of specific and systematic risk. CAPM is a very useful tool that has enabled financial analysts or the independent investors to evaluate the risk of a specific investment while at the same time setting a specific rate of return with respect to the amount of the risk of a portfolio or an individual investment. The CAPM method takes into consideration the factor of time and does not get wrapped up over by the systematic risk factors, which are rarely controlled. In this research paper, I will look at the implications of CAPM in the light of the recent development. I will start by attempting to explain and discuss the various assumptions of the CAPM. Secondly, I will discuss the main theories and moreover, the whole debate that is surrounding this area more specifically through the various critics of the CAPM assumptions.
When Sharpe (1964) and Lintner (1965) proposed CAPM, it was majorly seen as the leading tool in measuring and determining whether an investment will yield negative or positive return. The model attempts to expound the relationship between expected reward/return and the investment risk of very risky assets by helping determine the required rate of return for any of the risky asset (Reilly and Brown, 2011). The CAPM states that, “the expected return on a security or a portfolio equals the rate on a risk-free security plus a risk premium” (Heshmat, 2012, p. 504). It further states that the expected return of an asset has a positive linear correlation with a security of a non-diversifiable risk i.e. beta (Heshmat, 2012). Further, Ushad (2011) argue that CAPM is majorly based on the assumption that higher returns are linked with the higher beta values.
Therefore, years after the publication of the
When Sharpe (1964) and Lintner (1965) proposed CAPM, it was majorly seen as the leading tool in measuring and determining whether an investment will yield negative or positive return. The model attempts to expound the relationship between expected reward/return and the investment risk of very risky assets by helping determine the required rate of return for any of the risky asset (Reilly and Brown, 2011). The CAPM states that, “the expected return on a security or a portfolio equals the rate on a risk-free security plus a risk premium” (Heshmat, 2012, p. 504). It further states that the expected return of an asset has a positive linear correlation with a security of a non-diversifiable risk i.e. beta (Heshmat, 2012). Further, Ushad (2011) argue that CAPM is majorly based on the assumption that higher returns are linked with the higher beta values.
Therefore, years after the publication of the
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