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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 v - Essay Example
Author : tressashanahan
Finance & Accounting
Pages 7 (1757 words)
USEFULNESS OF CAPITAL ASSET PRICING MODEL (CAPM) By (Name) Subject Instructor Institutions Date Usefulness of Capital Asset Pricing Model (CAPM) Sharpe and Lintner introduced CAPM and its development was greatly boosted by Jack Treynor’s early work. The CAPM is one of the economic theories that give a description of the relationship between expected return and risk and is used to price risky securities…
In this sense, a high quantity of a security’s beta would result in a high expected return of an asset and vice versa. After CAPM was published, and after actual returns were compared with expected returns, many economists have since then criticized the simplicity of and the reality of application of CAPM. The CAPM is still subject to empirical and theoretical criticism despite it being the basis for over a hundred academic papers and having affected non-academic fiscal community considerably. Although it has an apparent invalidity, the CAPM is still widely used by companies as a valuable model for computation of capital cost through justification of high returns in correspondence to higher beta. Therefore, this paper will discuss the implications with regards to the current developments in the area. The paper will first explain and discuss various assumptions in relation to the model and thereafter discuss the key theories as well as the whole debate that surround this area particularly through the criticizing the assumptions. There are numerous economic applications of the CAPM. ...