Affiliation:
1. Lovely Professional University, India
2. University of Tabuk, Saudi Arabia
Abstract
This chapter provides a comprehensive exploration of the capital asset pricing model (CAPM) and its implications in the realm of finance. Beginning with an overview of the model's development and foundational principles, the chapter delves into its application in estimating expected returns, managing risk, and constructing investment portfolios. The strengths and limitations of CAPM are thoroughly examined, highlighting its role as a fundamental tool in financial analysis while acknowledging criticisms regarding its simplifying assumptions. Moreover, the chapter explores alternative models such as the three-factor model and arbitrage pricing theory, offering comparative insights into their approaches to asset pricing. Additionally, discussions encompass the influence of external factors like market conditions, regulatory changes, and behavioral dynamics on CAPM's efficacy.