I had a dinosaur of a professor just lecture that CAPM is the most widely practiced method used to determine expected return on “the street” this true?
I would think so. The whole concept of ‘Alpha’ and ‘market-neutral’ or ‘market trackers’ which are in fact all using the CAPM concept.
the same concept exists in fama french, GS equilibrium, apt, macro models, and comparables, I’m arguing actual model not theory
It sounds like a dinosaur professor thing to say because it’s just empty. Oodles of people might say “well it has a beta of 1.6 therefore [something about expected return]” and he would probably chock that up to CAPM. Nobody is doing any work there. I think when people are actually doing anything very productive, CAPM is pretty far in the background.
I don’t know about Wall Street but it’s definitely used by corporations to estimate cost of capital.
I’m pretty sure corps use empirical and market based estimates of their own cost of capital, at least that’s what happened at my old employer who was fortune 50.
Black Swan Wrote: ------------------------------------------------------- > I’m pretty sure corps use empirical and market > based estimates of their own cost of capital, at > least that’s what happened at my old employer who > was fortune 50. http://www.ensino.uevora.pt/tf/papers/BrunerEadesHarrisHiggins.pdf I had to read this article from 1998 for my MBA. I’m sure things have changed slightly since then, but 85% of the companies surveyed use CAPM. Advanced Micro Allergan Dillon, Black & Decker Cellular One Chevron Colgate-Palmolive Comdisco Compaq Eastman Kodak Gillette Guardian Industries Henkel Hewlett-Packard Kanthal Lawson Mardon McDonald’s Merck Monsanto PepsiCo Quaker Oats Schering-Plough Tandem Union Carbide US West Walt Disney Weyerhauser Whirlpool J.P. Morgan Lehman Brothers Merrill Lynch Morgan Stanley Salomon Brothers Smith Barney
still used widely…
so let me get this straight, that would be 1 decade ago…
“used” does not mean it’s the tool to calculate the required return. I would use it too (if I was doing anything with equity) but just because it’s simple. I wouldn’t base a single decision on it.