The Capital Asset Pricing Model



CAPM tries to measure returns as a function of nondiversifiable risk.  CAPM is one of the most eloquent financial models in existence.  However it also has many problems. Notes on the development as well as the current state of  CAPM.


 

  Some of the problems associated with CAPM  are:

 Use of  an historical beta to calculate Expected return.

 Must measure portfolio returns else will get firm specific events which is not what CAPM is concerned with.

 Many Anomalies exist

          Fama and French (1992) found that Beta did not help explain return when size and market to book (book to market) were included in the pricing model.
 
 

For the best coverage I have seen of market anomalies as well as other market anomalies check out the Investorhome web site.  It is an excellent reference!

See also Market Efficiency