what is the most controversial economic/financial "theory" in CFA curriculum?

hard to think the “laws of supply and demand” will ever be debunked… but I know there are some real academic arguments over various theories in economics and finance…

What do you think is the most controversial concept in the CFA curriculum that may very well be proven wrong one day??

  1. Modern Portfolio Theory

  2. Underlying assumption of Gaussian distribution and IID time series for multiple models, including Black-Scholes

The efficiency of markets.




All one factor models including CAPM with its based hypothesis.

Treasury as risk free asset

Modigliani-Miller should be hanged. God forgive if they are dead already…

I would throw my glass water bottle to the face of the analyst who mentions this in a presentation.

It’s still ubiquitous.

This, and maybe throw in there the CAPM?

huh?? but all analysts at least the sell sides that we talk to use CAPM to come up with the equity premium portion of WACC…I use CAPM although modified but still CAPM for equity risk premium…so what do the analysts you’ve heard use for equity premium?

Maybe multi factor models like APT.

CAPM is an extension of Markowitz’s efficient frontier work and falls under the broad umbrella of MPT, so de facto I was including CAPM in my response.

multi factor model for equity risk premium? that’s new to me…

this is not already debunked?

At level 2, one of the interest rate models does not contemplate negative interest rates. Cox ingersoll does not allow for negative interest rates with the usual a and b specifications. The Vasicek model section states, “The main disadvantage of the Vasicek model is that it is theoretically possible for the interest rate to become negative.”

Trillions of euros of negative rate bonds are mocking your outdated material CFA Institute.

It’s not impossible but it is very difficult to apply in practice. That’s why it is still necessary use the CAPM because of its simplicity. This does not mean that it’s good and that such a calculation of risk premium is always correct.

8 years in buy side equity research and i have never never encountered an analyst who does not use CAPM to calculate the equity risk premium portion of their WACC. Of course some use their own version to come up with each variable but nonetheless we all use CAPM and it is not multi factor model…