The most popular and father of all models in asset pricing (CAPM) from Sharpe (1964) and Lintner (1965a) was developed independently of each other using the portfolio theory to deduce a market equilibrium. Portfolio theory with a riskless asset and unlimited short sales was the basis for this model (Krause, 2001). To add to the charateristics of accumulating portfolio theory to ascertain the market stability, it also considers the decision of a sole investor. Given the price Sharpe (1964) and Lintner (1965a) were with the belief that portfolio theory makes use of mean variance criterion which is sufficient to form belief about means only, variances as well as co-variance instead of the entire distribution. Investors are said to vary in line
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pp. 433; Lintner, 1965a. pp. 600 and Lintner, 1965b. pp.25). As internationally recognized, there can never be a theory propounded without assumptions, CAPM is of several assumptions such as _ no transaction costs and taxes and many more. Several critics such as the absence of transaction costs and taxes, unrestricted borrowing and loaning at risk free rate and the linear dependency of assets have been leveled against CAPM.
The numerous critics leveled against CAPM, gave way for forms of such model to adjust or improve it for usage. The popular forms of CAPM include conditional capital asset pricing model which suggests that it is dully reasonable to all available information on the business cycle ( to use conditional moments) rather than relevant variables to form …show more content…
Lintner (1965) and Sharpe (1964) consider a situation in which opportunities of investment are constant and efficient portfolios are being held by potential investors to maximize their expected returns for a specified risk. With CAPM the premium of asset risk will be a fractional to its existing beta. Literature on CAPM adds to the fact that certain variables other than the required rate of return on a market portfolio proxy command significant risk premium. It was originally developed in 1961 by Treynor but has undergone series of investigations as over years scholars have made an attempt to improve the performance of CAPM (Parker and Julliard, 2005; Berkman, Jacobsen and Lee, 2011). The external and internal habit model (Abel, 1990; Constantinides, 1990; Ferson and Constantinides, 1991; Campbell and Cochrane, 1999), with non-standard preferences and rich consumption dynamics (Epstein and Zin, 1989, 1999), disaster risk model (Berkman, Jacobsen and Lee, 2011) and three factor model (Fama and French, 1993) are of different kinds of models but with the same intention of improving the performance of
pp. 433; Lintner, 1965a. pp. 600 and Lintner, 1965b. pp.25). As internationally recognized, there can never be a theory propounded without assumptions, CAPM is of several assumptions such as _ no transaction costs and taxes and many more. Several critics such as the absence of transaction costs and taxes, unrestricted borrowing and loaning at risk free rate and the linear dependency of assets have been leveled against CAPM.
The numerous critics leveled against CAPM, gave way for forms of such model to adjust or improve it for usage. The popular forms of CAPM include conditional capital asset pricing model which suggests that it is dully reasonable to all available information on the business cycle ( to use conditional moments) rather than relevant variables to form …show more content…
Lintner (1965) and Sharpe (1964) consider a situation in which opportunities of investment are constant and efficient portfolios are being held by potential investors to maximize their expected returns for a specified risk. With CAPM the premium of asset risk will be a fractional to its existing beta. Literature on CAPM adds to the fact that certain variables other than the required rate of return on a market portfolio proxy command significant risk premium. It was originally developed in 1961 by Treynor but has undergone series of investigations as over years scholars have made an attempt to improve the performance of CAPM (Parker and Julliard, 2005; Berkman, Jacobsen and Lee, 2011). The external and internal habit model (Abel, 1990; Constantinides, 1990; Ferson and Constantinides, 1991; Campbell and Cochrane, 1999), with non-standard preferences and rich consumption dynamics (Epstein and Zin, 1989, 1999), disaster risk model (Berkman, Jacobsen and Lee, 2011) and three factor model (Fama and French, 1993) are of different kinds of models but with the same intention of improving the performance of