Editorial Type:
Article Category: Research Article
 | 
Online Publication Date: 01 Mar 2012

The Capital Asset Pricing Model: A Fundamental Critique

Page Range: 23 – 34
DOI: 10.5791/BVR-D-12-00001.1
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Abstract

The Capital Asset Pricing Model (CAPM) derives an ex post equilibrium relationship for the price of non-diversifiable risk based on investors utilizing two criteria only when making investment decisions: expected value and standard deviation. This article investigates the ex ante and ex post state of the CAPM in a hypothetical three-asset universe: either the CAPM irrationally indicates identical respective discount rates for different amounts of risks (i.e., total risk versus non-diversifiable risk) or the CAPM circularly indicates the ex ante price of total risk (read: standard deviation) depending on the ex post price of non-diversifiable risk.

Copyright: American Society of Appraisers
Figure 1
Figure 1

(a) Capital Market Line; (b) Security Market Line

Figure 2
Figure 2

(a) Ex Ante Equilibrium Relationship; (b) Ex Post Equilibrium Relationship

Figure 3
Figure 3

(a) Ex Post Equilibrium Relationship; (b) Ex Ante Equilibrium Relationship

Contributor Notes

Roger Dayala is a senior investment professional at Insinger de Beaufort (IdB), part of BNP Paribas Wealth Management. He is also the Program Director of the Executive MSc in Finance program at the The Hague Executive Campus

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