China-USA Business Review (ISSN 1537-1514) Vol.14, No.12, 2015 (original) (raw)

The Capital Asset Pricing Model: An Overview of the Theory

International Journal of Economics and Finance, 2014

Although the Capital Asset Pricing Model (CAPM) has been one of the most useful and frequently used theories in determining the required rate of return of a security, the application of this model has been controversial since early 1960s. The CAPM was introduced by Jack Treynor, William Sharpe, John Lintner and Jan Mossin independently, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. In theory, the capital asset pricing model is employed to set the investor required rate of return on a risky security given the non-diversifiable firm-specific risk, as the systematic risk will be eliminated in a well-diversified portfolio. This research aims to shed the light on this model by discussing the assumptions, the evolution of the Sharpe and Lintner model, and reviewing the literature on the relaxation of model assumptions and the critiques of the CAPM. Finally, the Arbitrage Pricing Model as an extension for the CAPM will be discussed.

On the validity of the Capital Asset Pricing Model

THE LAHORE JOURNAL OF ECONOMICS, 2000

One of the most important developments of modern finance is the Capital Asset Pricing Model (CAPM) of Sharpe, Lintner and Mossin. Although the model has been the subject of several academic papers, it is still exposed to theoretical and empirical criticisms. The CAPM is based on Markowitz’s (1959) mean variance analysis. Markowitz demonstrated that rational investors would hold assets, which offer the highest possible return for a given level of risk, or conversely assets with the minimum level of risk for a specific level of return.

A Study on Developing of Asset Pricing Models

International Business Research, 2011

This study introduces the development and modifications of the widely used standard capital asset pricing model (CAPM). Many modifications are applied to the model's challenging financial variables such as: financial risk factors, liquidity risks, downside risks, risk of non expected events, and economic and operational risk factors. Efficiency of the model is increased when applying various challenging financial variables. As a result of the gradual CAPM developments, various new models will present better interpretations of market conditions in economic units and portfolio structure. Furthermore, this study will show the importance of applying the new models advantages and disadvantages for financial managers, financial analysts and investors.

The Arbitrage Theory of Capital Asset Pricing

The purpose of this paper is to examine rigorously the arbitrage model of capital asset pricing developed in Ross [13, 141. The arbitrage model was proposed as an alternative to the mean variance capital asset pricing model, introduced by Sharpe, Lintner, and Treynor, that has become the major analytic tool for explaining phenomena observed in capital markets for risky assets. The principal relation that emerges from the mean variance model holds that for any asset, i, its (ex ante) expected return Et = p + u, 3 (1) where p is the riskless rate of interest, X is the expected excess return on the market, E,-p, and is the beta coefficient on the market, where CJ,~~ is the variance of the market portfolio and 02 " , is the covariance between the returns on the ith asset and the market portfolio. (If a riskless asset does not exist, p is the zero-beta return, i.e., the return on all portfolios uncorrelated with the market portfolio.)l The linear relation in (1) arises from the mean variance efficiency of the market portfolio, but on theoretical grounds it is difficult to justify either the assumption of normality in returns (or local normality in Wiener diffusion models) or of quadratic preferences to guarantee such efficiency, and on empirical grounds the conclusions as well as the