Four decades after its advent, the capital assets pricing model proposed by Nobel Prize laureate William Sharpe and by John Lintner, known as CAPM, remains the most widely used model in estimating fi rms' cost of capital and valuing portfolios. This is due to the model's predictive power for risk and risk-return ratios. The purpose of this article is to show that CAPM has empirical flaws associated with theoretical simplifi cations and diffi culties implementing valid tests for the model. The article concludes that the limitations of CAPM are challenges to be explained by alternative models.
Asset pricing model; term structure; bonds; general equilibrium theory; empirical test