FINS2624 Lecture Notes - Lecture 6: Capital Asset Pricing Model, Human Capital, S&P 500 Index
Document Summary
Capm relies on several strong assumptions that may not hold in reality: Some investors may exhibit behavioural bias, and make irrational investment decisions, which could affect asset prices. Limits to arbitrage such as short sale constraints may also allow for temporary deviations of asset pricing from equilibrium. Homogeneous expectations and public tradability of all assets are particularly problematic. Even if capm is the correct pricing model, in reality some assets could be mispriced. Under the capm, m should include all risky assets, including for example, an individual"s human capital, and all risky assets are tradeable. In reality there is no observable market portfolio m containing all risky assets and not all risky assets are tradeable (e. g. human capital, unlisted assets) The true market portfolio m is therefore no observable and the capm is untestable. Since we cannot observe the true market portfolio m, we try to pick a proxy for m when using the capm in practice.
