Introduction to CAPM: Advantages, Disadvantages and Alternatives

Abstract

Capital Asset Pricing Model (CAPM) is a widely used financial model for asset pricing. This paper summarizes the advantages of CAPM, highlighting its applicability to most developed countries. Based on academic research, this paper also discusses the limitations of the CAPM model, including issues with its assumptions and its limited suitability for developing countries. In the end, Alternative solutions are discussed, including finding other financial models to replace or improve the CAPM. However, through the summary, this paper finds the current financial models are relatively independent and most of them have some shortcomings in the assumption. It is difficult to find a perfect model. Therefore, the conclusion is that the future research direction should be to integrate a summative financial model to integrate the advantages of each model to help future financial analysis in both developed and developing countries.