The Capital Asset Pricing Model (CAPM), a cornerstone of modern finance, describes the relationship between the expected returns of assets and systemic risks. It is widely applied in fields such as portfolio management and capital cost estimation due to its simple structure and clear logic. This paper, through the method of literature review, systematically discusses the CAPM, assesses the effectiveness and limitations of CAPM in the actual financial market from three levels. Meanwhile, this paper compares CAPM with extended asset pricing models such as the Fama-French three-factor and Carhart Four-factor model. It is found that the latter is more persuasive in explaining abnormal market phenomena, such as the small-cap stock effect, value premium, and momentum effect. The article finally points out that future research can further explore hybrid models that integrate CAPM with behavioral finance or market anomalies, or develop asset pricing systems that can dynamically adapt to changes in investor behavior, thereby enhancing the practical applicability of the models.
Haoyang Li (Tue,) studied this question.