Title: The capital asset pricing model: a critical literature review

Authors: Matteo Rossi

Addresses: Department of Analysis of Social and Economic System (DASES), DEMM, University of Sannio, Via delle Puglie, 82, 82100 Benevento, Italy

Abstract: What is the relationship between the risk and expected return of an investment? The capital asset pricing model (CAPM) provides an initial framework for answering this question. The CAPM (Sharpe, 1964; Lintner, 1965) marks the birth of asset pricing theory. This model is based on the idea that not all risk should affect asset prices. The model thus provides insight into the kind of risk that is related to return. Four decades later, the CAPM is still widely used in applications. The CAPM provides a methodology for translating risk into estimates of expected ROE. Its application continues to generate debate: many scholars argued that the CAPM is based on unrealistic assumptions. This paper lays out the key ideas of the CAPM, the history of empirical work on the CAPM and the implications of this work on the shortcomings of the CAPM.

Keywords: capital asset pricing model; CAPM; risk; market beta; market portfolio; literature review; return on investment; RoI; asset prices.

DOI: 10.1504/GBER.2016.078682

Global Business and Economics Review, 2016 Vol.18 No.5, pp.604 - 617

Received: 28 Jan 2015
Accepted: 20 Apr 2015
Published online: 01 Sep 2016 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article