Paper Topic:

?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.?

Capital Asset Pricing Model

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Date (18 , 11 , 2010

CONTENTS

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TOC \o "1-3 " \h \z \u HYPERLINK \l "_Toc4 " CONTENTS PAGEREF _Toc4 \h 2

HYPERLINK \l "_Toc5 " Introduction PAGEREF _Toc5 \h 3

HYPERLINK \l "_Toc6 " The CAPM Model and Formula PAGEREF _Toc6 \h 3

HYPERLINK \l "_Toc7 " Application CAPM Model PAGEREF _Toc7 \h 5

HYPERLINK \l "_Toc8 (a ) Price determination PAGEREF _Toc8 \h 5

HYPERLINK \l "_Toc9 (b ) Determining costs of capital

PAGEREF _Toc9 \h 5

HYPERLINK \l "_Toc0 (c ) Capital Budgeting PAGEREF _Toc0 \h 6

HYPERLINK \l "_Toc1 " Limitations of CAPM Model PAGEREF _Toc1 \h 6

HYPERLINK \l "_Toc2 (a ) Unrealistic assumptions PAGEREF _Toc2 \h 6

HYPERLINK \l "_Toc3 (b ) Difficulties in Validation of CAPM PAGEREF _Toc3 \h 7

HYPERLINK \l "_Toc4 " Conclusion PAGEREF _Toc4 \h 8

Introduction

The Capital Asset Pricing Model (CAPM ) was developed by William Sharpe in1964 , in an attempt to determine the risk return trade off made by investors . The model has been useful in pricing of securities or a portfolio (Markowitz , 1999 . The objective of this essay is to evaluate the contributions of this theory in the modern finance world as well as its limitations

The CAPM Model and Formula

The CAPM model is widely used to determine the risk return trade off made by investors . According to French (2002 , investors are interested in lowering the risk of their individual assets and or a portfolio as well as in maximizing the returns thereof . However , Madura...

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