‘Absurd’ CAPM model is target of new paper

BVWireIssue #145-3
October 15, 2014

A new paper skewers the capital asset pricing model (CAPM) as “an absurd (having no rational or orderly relationship to human life; contrary to all reason or common sense) model because its assumptions and its predictions/conclusions have no basis in the real world.”

No common sense: The paper, CAPM: An Absurd Model, by Pablo Fernandez (University of Navarra, IESE Business School), goes on to say that many professionals are raking in big fees because of the use of “CAPM instead of common sense to calculate the required return to equity.” CAPM users are making “many illogical errors valuing companies, accepting/rejecting investment projects, evaluating fund performance, pricing goods and services in regulated markets, calculating value creation,” and so on, the paper says.

What do you think? The new paper has sparked a lively discussion in the LinkedIn Business Valuation and Advisory Network group.

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