What is the relationship between the risk and expected return of an investment? The capital asset pricing model (CAPM) provides an initial framework for answering this question. The CAPM (Sharpe, 1964; Lintner, 1965) marks the birth of asset pricing theory. This model is based on the idea that not all risk should affect asset prices. The model thus provides insight into the kind of risk that is related to return. Four decades later, the CAPM is still widely used in applications. The CAPM provides a methodology for translating risk into estimates of expected ROE. Its application continues to generate debate: many scholars argued that the CAPM is based on unrealistic assumptions. This paper lays out the key ideas of the CAPM, the history ofempirical work on the CAPM and the implications of this work on the shortcomings of the CAPM.

The Capital Asset Pricing Model: A critical literature review

ROSSI M
2016

Abstract

What is the relationship between the risk and expected return of an investment? The capital asset pricing model (CAPM) provides an initial framework for answering this question. The CAPM (Sharpe, 1964; Lintner, 1965) marks the birth of asset pricing theory. This model is based on the idea that not all risk should affect asset prices. The model thus provides insight into the kind of risk that is related to return. Four decades later, the CAPM is still widely used in applications. The CAPM provides a methodology for translating risk into estimates of expected ROE. Its application continues to generate debate: many scholars argued that the CAPM is based on unrealistic assumptions. This paper lays out the key ideas of the CAPM, the history ofempirical work on the CAPM and the implications of this work on the shortcomings of the CAPM.
capital asset pricing model; CAPM; risk; return; risk free; market beta; market portfolio
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/20.500.12070/40228
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