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A review of capital asset pricing models

Don U.A. Galagedera (Department of Econometrics and Business Statistics, Monash University, Caulfield East, Australia)

Managerial Finance

ISSN: 0307-4358

Article publication date: 4 September 2007

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Abstract

Purpose

The main aspect of security analysis is its valuation through a relationship between the security return and the associated risk. The purpose of this paper is to review the traditional capital asset pricing model (CAPM) and its variants adopted in empirical investigations of asset pricing.

Design/methodology/approach

Pricing models are discussed under five categories: the single‐factor model, multifactor models, CAPM with higher order systematic co‐moments, CAPM conditional on market movements and time‐varying volatility models.

Findings

The paper finds that the last half‐century has witnessed the proliferation of empirical studies testing on the validity of the CAPM. A growing number of studies find that the cross‐asset variation in expected returns cannot be explained by the systematic risk alone. Therefore a variety of models have been developed to predict asset returns.

Research limitations/implications

There is no consensus in the literature as to what a suitable measure of risk is, and consequently, as to what is a suitable measure for evaluating risk‐adjusted performance. So the quest for robust asset pricing models continues.

Originality/value

From its beginning to its possible demise the paper reviews the history of the CAPM assuring that we are all up to speed with what has been done.

Keywords

Citation

Galagedera, D.U.A. (2007), "A review of capital asset pricing models", Managerial Finance, Vol. 33 No. 10, pp. 821-832. https://doi.org/10.1108/03074350710779269

Publisher

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Emerald Group Publishing Limited

Copyright © 2007, Emerald Group Publishing Limited

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