What is the CAPM?

CFA Level II
#1

I found this one confusing… want to see what everybody else thinks! What is the CAPM A) the most realistic model in explaining the risk-return relationship. B) a useful model in calculating expected returns. C) a relatively easy model to implement and test. D) a subset of the arbitrage pricing theory (APT) model

#2

both b and d, but I’ll go with D

#3

Will go with D, as both are equalibrium models…just the CAPM is single factor and APT is multfactor model.

#4

D Smarshy, don’t fall for B…CAPM is only good in academia

#5

I’ll pick C

#6

I thought capm is for asset allocation not for returns? or maybe I am going crazy messing with the concepts

#7

Actually it is easy to calculate. I thought CAPM calculated intrinsic value rather than an estimate?

#8

Excellent - both of you got the correct answer. I had some trouble deciding which answers are NOT correct though. B sounded reasonable (in fact, isn’t that why we use the model 99% of the time, at least on the CFA paper?). I also thought C sounded reasonable, as beta could be calculated as a simple regression, and verified with a measure such as RMSE, though you would always have to make an assumption that some form of index “represents” the market portfolio.

#9

C

#10

Whoops -this thread moved while I typed. D is the correct answer, in case I wasn’t clear :slight_smile:

#11

I’ll pick C.