Question

compare and contrast capital asset model to the free cash flow model?

Answer 1

Capital asset model basically states expected return on asset is equal to risk free rate plus a risk premium that asset carries relative to the market it operates in. Capital asset model is used to price risk of an asset relative to the market. Capital asset model is utilized to measure risk premium inherent (generally in a capital market investment - equity/portfolio).

Thus capital asset model is to compare expected return vs the risk taken.

whereas

the free cash model relies on the expected cash flows generated by that asset discounted to present value using the weighted average cost of capital being invested. Free cash model is basically utilized for capital budgeting.

The free cash model is to judge whether present value of future cash flows are more than the investible funds, across opportunities and the one which provides a better value relative to amount invested today can be chosen for investment.