Capital Asset Pricing Model: Analysis, Flaws & Solutions

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).