Question

Compare and contrast the international capital asset pricing model to the domestic capital asset pricing model. Your response should be at least 200 words in length.

Answer 1

International Capital Asset pricing model and domestic Capital Asset pricing model are different because-

A. When we will be calculating the risk free rate of domestic Capital Asset pricing model,we will be taking the risk-free rate prevalent in the domestic economy but when we will be taking the international risk free rate will be trying to find out the weighted average risk free rate of various countries in which the business is operational in order to find out the international Capital Asset pricing.

B. There is a large number of systematic risk associated with operations in multinational companies because they are operating in global arena so they will be exposed to systematic risk of a large number of international factors and hence they will be having a very unpredictable beta according to their weighted average performance in different countries where is domestic beta is comparatively easy to calculate because of their limited exposure to the geographical boundaries of one country.

C. Market risk premium is also difficult to find for a multinational company because it will be again weighted average of various differences between various countries risk free rate and market rate of return where as domestic country risk free rate and market rate of return are better defined and market risk premium is easy to find.

Hence, it can be said that International Capital Asset pricing model is more complex than domestic Capital Asset pricing model.