Capital Asset Pricing Model

How far the Capital Asset Pricing Model has been successful in explaining asset returns, defining its approach and assumptions.

Semester 2013
Department of Accounting and Finance
Lord Ashcroft International Business School
Anglia Ruskin University
Table of Contents Introduction…………………………………………………………………………......... 3
What’s Capital Asset Pricing Model…………………………………………………..... 3 1. Definition………………………………………………………………………………...3 2. Terminology……………………………………………………………………………...3
Risk and Capital Asset Pricing Model………………………………………………….. 3 1. Systematic Risk…………………………………………………………………………..3 2. Unsystematic Risk………………………………………………………………………..3
Asset Returns and Capital Asset Pricing Model……………………………………….. 3
Capital Asset Pricing Model Explanation…………………………………………….... 4 1. Formula…………………………………………………………………………………..4 2. Beta……………………………………………………………………………………....4 3. Security Market Line (SML) and graphical representation……………………………...4
Critique of Capital Asset Pricing Model Assumptions………………………………... 5
Shortcomings of Capital Asset Pricing Model…………………………………………. 6 1. Advantages of CAPM…………………………………………………………………...6

References: Eugene F. Fama and Kenneth R. French (2004). Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, Vol. 18, No.3, p25-46. Andre F. Perold (2004). The Capital Asset Pricing Model. Journal of Economic Perspectives, Vol. 18, No.3, p.3-24. Robert C J. Howard Finch, Steve P. Fraser and Steven R. Scheff (2010). Teaching the CAPM in the introductory finance course. Journal of Economics and Finance Education, Vol. 10, No. 1. ACCA (2013). P4 Advanced Financial Management. London: BPP Learning Media Ltd. ACCA (2008). The Capital Asset Pricing Model. ACCA Student Accountant, January, p.69-70. ACCA (2008). CAPM: Theory, Advantages and Disadvantages. ACCA Student Accountant. June-July, p.50-52. ACCA (2009). Cost of Capital. ACCA Student Accountant. October, p.1-4. ACCA (2009). Cost of Capital. ACCA Student Accountant. November, p.1-6. Bibliography Investopedia, 2013 Enotes, 2013. Capital Asset Pricing Model. [Online]Available at: (Accessed 02nd March 2013). Reference for Business, 2013. Capital Asset Pricing Model. [Online]Available at: (Accessed 03rd March 2013). Wake Forest University, 2013. Critique of CAPM. [Online] Available at: (Accessed 15th March 2013). UK Essays, 2013. Capital Asset Pricing Model. [Online] Available at: (Accessed 20th March 2013). Oxbridge Writers, 2013. The Capital Asset Pricing Model [Online] Available at: (Accessed 20th March 2013).