Beyond The Capital Asset Pricing Model

The capital asset pricing model (CAPM) [2] proposed by Jack Treynor, William Sharpe, John Lintner, Jan Mossin in 1972 is an important way to predict asset risk and return. Today, CAPM is a very simple and attractive tool, so it is still widely used in applications. However, in many cases it is problematic and we need other extensions and models available to evaluate the risks and returns of assets. We know that CAPM is a model for determining the price of individual securities or portfolios under many rigorous assumptions.

Since 1970, finance companies have used the capital asset pricing model (CAPM) to calculate their portfolio performance and capital cost. However, there are many models of asset pricing that must identify the risk of assets, and many researchers have found that Mossin (1966), Sharp (1964), Sharp (1964), Lintner (1965) We measure the risk premium of each unit in the whole asset and calculate the asset risk by measuring the average of market beta. Therefore, the CAPM module has a linear relationship between the market beta and the risk premium of the asset, which can be considered a systematic risk. In addition, CAPM shows that the asset return rate varies depending on the asset market beta. (Fazil, 2007)

The capital asset pricing model (CAPM) of Sharpe (1964) introduces the concept of systemic risk and residual risk. The progress of the model includes estimation of the single element risk model of the asset beta. While the remaining (specific company) risk can be dispersed, beta measures portfolio sensitivity to the business cycle (comprehensive index). As the CAPM relies on a single index, the risks inherent in assets are too simple. The arbitrage price theory proposed by Ross (1976)