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Name three possible explanations for empirical observations which seem to deviate from or contradict the CAPM:

Name three possible explanations for empirical observations which seem to deviate from or contradict the CAPM:

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Answer #1

Three possible explanation for various empirical observation which seems to deviate or contradict the Capital Asset pricing model will be-

A)investors are never rational in nature and they will never be diversifying properly and there will always be a behavioral bias in their investment.

B) Capital Asset pricing model assumes that the beta of a stock is always stable in nature but in the real world the beta of a stock is never stable and it is always fluctuating in nature and it can never be fixed.

C)the risk-free rate is never risk free even the Government bonds are subject to default. various government has been downgraded significantly and they are not able to service their debt.

these are the three possible contradiction that could limit the application of Capital Asset pricing model in the real world and they may be the reasons to deviate CAPM from original form.

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