Capital Asset Pricing Model: Analysis, Flaws & Solutions

Capital Asset Pricing Model: Analysis, Flaws & Solutions

*Sandhya A

II SEM MBA,

AIMS IBS B-SCHOOL

Under the guidance of Dr. Ravichandra Reddy (Dean Academics of AIMS IBS B-School)

sandhyasandhyaa762@gmail.com

ABSTRACT:

 In the ambit of earning from the investments in the capital market it always comes with risk component. Parallelly the risk element is influenced different factors and a model known as CAPM. CAPM developed by Sharpe (1964) and Lintner (1965), the CAPM suggests that only certain types of risk, particularly market-related risk, affect a company’s stock price. In this case, CAPM is taken as a measure to estimate the expected return on its shares based on its market beta and the risk-free rate.  While CAPM remains a cornerstone in asset pricing and investment decisions. Despite CAPM’s continued relevance in financial modelling, there are concerns that its underlying assumptions may oversimplify Tata Motors' real-world risk factors, such as industry-specific challenges and global market volatility.

This paper explores the practical application of CAPM to Tata Motors, highlighting its insights and limitations in predicting the company's return on equity (ROE).

KEYWORDS- Capital Asset Pricing Model; CAPM, Risk, Return, Beta, Risk-free rate.