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
The information contained in this product is based on content obtained by ASA from sources considered to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. BVR and ASA accept no liability for the use of such information which is provided "AS IS" and with no warranties, express or implied.