What are the disadvantages and limitations of the CAPM model?

The CAPM suffers from several disadvantages and limitations that should be noted in a balanced discussion of this important theoretical model. To use the CAPM, values need to be assigned to the risk-free rate of return, the return on the market, or the equity risk premium (ERP), and the equity beta.

What are the limitations of the CAPM formula?

There are some limitations to the CAPM, such as making unrealistic assumptions and relying on a linear interpretation of risk vs. return. Despite its issues, the CAPM formula is still widely used because it is simple and allows for easy comparisons of investment alternatives.

Why is CAPM criticized?

CAPM is criticized for its many unrealistic assumptions, and investors must understand the assumptions underlying the CAPM to accurately understand and interpret the results. CAPM assumes that investors are looking to maximize their return and that they can evaluate expected return and risk.