Question

If the CAPM holds, then what should you do as a manager if you cannot find projects that meet the hurdle rate suggested by the CAPM?

Answer 1

If the manager cannot find projects that would give the return mandated by CAPM, then he should distribute the retained earnings/surplus cash to the shareholders in the form of either cash dividends or share repurchases. It is then upto the shareholders to find alternative investment opportunities that will give them their desired return with associated risks.

If the manager holds on to excess cash, despite not having adequate qualifying projects, then he would be helping to erode shareholders' wealth.