Dear All:
I am so confused. Is extended CAPM and ICAPM the same ? could you please give an example.
Thank you so much for your time
The extended CAPm is a way to continue to use the usual CAPM (domestic CAPM) in an international setting. It is different from ICAPM. We still use the formula Rf + Beta(MRP), but now the market is the whole world market, and Rf is your domestic risk free rate. That’s all. But for that to be true, you have to make a crazy assumption, which is that inflation is measured the same way in all countres, i.e., that it is based on the same consumption basket, and that PP holds all the time (i.e., the same item costs the same amount of money every where). That means there is no such thing as a real exchange rate, only inflation differential matters.
ICAMP is more realistic. It says let us explicitly include the impact of exchange rates, thus accept that there is real exchange rate, and use the stated formula in the book for that.