Why would Benjamin Graham take issue with CAPM as a method for defining risk?

Expert Solution

Benjamin Graham will be taking issues with Capital Asset pricing as a model to define risk because Capital Asset pricing model is only considering the systematic risk associated with investment into the stock because beta of the stock is only representative of the systematic risk associated with stock and Capital Asset pricing model is only assuming that all the portfolio are already diversified.

Capital Asset pricing model advocates that all the portfolio are completely diversified and investors are only exposed to the systematic risk whereas Benjamin Graham was an advocator of allocation of the assets in different proportion because he believed that portfolios are not diversified and it is related to the the ability of investor to diversify the portfolio, so it shouldnot assume that all the portfolio are diversified & investor are only exposed to the systematic risk so he would have a strong objection of Capital Asset pricing model being one factor Model and which is undertaking beta for determination of the systematic risk.

jeff jeffy answered 2 years ago

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