The Capital Asset Pricing Model (CAPM)

THE CAPITAL ASSET PRICING MODEL
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‘The Capital Asset Pricing Model (CAPM)’ has dominated academic literature and greatly influenced the practical world of finance and business for almost half a century; as a way to measure systematic risk. Researchers in the 1980s and 1990s have questioned the relationship
between systematic risk, measure beta, and returns on securities. Despite heavy criticism of
the model from the academic community, CAPM has reached new heights of popularity in the outside world (Arnold pp 269). Hundreds of thousands have studied the CAPM in universities and now hold key positions ready to make decisions based on the model. Does
CAPM-beta really provide the answer to the risk-return relationship? Does CAPM provide a
good account for pricing a firm’s debt or equity? Hence is CAPM of relevance to corporate managers?
Explain and discuss this contention

Note:
This is an individual assignment.
Assignment must be submitted through Turnitin prior to hard copy submission to the
undergraduate centre. Please note that the Turnitin match must not materially exceed
20%.
Assignment Suggestion
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This assignment relates to the lecture on portfolio theory and the capital asset pricing model.
To answer it satisfactorily, you will need to give some thought to the question and to discuss
the relationship between risk and return, define the fundamental features of the capital asset
pricing model and discuss the empirical evidence relating to the CAPM. The main body of
your report should focus on why the academic community are turning away from the CAPM.
The latter part of the question requires more thought, and you should try to highlight features
of the CAPM which lends itself to the context of corporate managers. In the development of
your answer you are expected to include relevant economic and financial concepts and where
appropriate (you may if you wish make use of relevant diagrams).
Finally remember imperfect English is infinitely preferable to plagiarism!

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