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Why do financial managers have some difficulty applying the CAPM in financial decision making? Generally, what...

Why do financial managers have some difficulty applying the CAPM in financial decision making? Generally, what benefits does the CAPM provide them?

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Expert Solution

The financial managers may face some difficulty during the application of the CAPM in financial decision making. These can be the following-

I) A lot of assuptions- The CAPM model inolves a lot of assumptions which is too unrealistic at times. This may lead to doubt about the accuracy of the results.

II) Unceratinity in using the rates and value- Risk-free Rate (Rf), Return on the market (Rm), and other values if not entered correctly may lead to volatility.

Despite of these difficulties inCAPM there are some benefits as well. Which can be the following-

I) Eliminates the unsystematic risks

The CAPM model makes the assumption that the investors have a diversified portfolio as same as similar to a market portfolio. Diversified portfolio eliminates unsystematic (specific) risk.

II) Ease of Application-

It just simplifies the calculation so that easy range of possible outcomes can be derived.

jeff jeffy answered 2 years ago
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