Question

Compare and contrast how CAPM is viewed and used in academia versus in the investment industry.

Answer 1

CAPM or the Capital Asset Pricing Model gives the relationship between the expected return on portfolio and the systematic risk. The theory is a good method to understand the way in which an investment can manage their investment.

In academics it is a popular method used for analysis. But in investment industry it is not so much in use. This is mainly because the assumptions of the theory are unreal and impractical. Some of the unrealistic assumptions are that there is a perfect capital market existing where no taxes and no transaction cost exist. Also the investors borrow and lend at the risk free rate if return. This is not true in real life. The theory is not useful to compare investments that have different time periods. Thus, CAPM is more accepted in academics than in investment industry.