The Capital Asset Pricing Model: A Fundamental Critique

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American Society of Appraisers Business Valuation Review™
Spring 2012 Volume 31, Issue 1 pp. 23-34
Roger Dayala


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.
The Capital Asset Pricing Model: A Fundamental Critique
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