Question

How does the Capital Asset Pricing Model (CAPM) improve on Markowitz and Treynor-Black methods?

How does the Capital Asset Pricing Model (CAPM) improve on Markowitz and Treynor-Black methods?

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Answer #1

The CAPM is an improvement on the Markowitz model as the Markowitz model concentrates on the expected return of individual investments and the correlation between them. But the CAPM focusses on the systematic risk and links the risk of the investment with the market as a whole. The Treynor-Black method helps to identify the optimal portfolio. It also studies the investment in two portfolios i.e active portfolio and passive portfolio. The biggest advantage of CAPM is that it is easy to calculate and understand when compared to the other two methods.

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