Capital Asset Pricing Model: Should We Stop Using It?

The Capital Asset Pricing Model (CAPM) predicts that expected returns on securities are a positive linear function of their market ß s (betas) and market ß is adequate to describe the cross-section of expected returns. There is a controversy regarding the empirical validity of CAPM. This article reviews the content and scope of the model, examines the issues in the controversy, and provides an empirical assessment of the model in India. It notes that the evidence is not sufficient to drop the use of CAPM; one must, however, recognize and understand its limitations.