A review of capital asset pricing models

Purpose – The main aspect of security analysis is its valuation through a relationship between the security return and the associated risk. The purpose of this paper is to review the traditional capital asset pricing model (CAPM) and its variants adopted in empirical investigations of asset pricing. Design/methodology/approach – Pricing models are discussed under five categories: the single-factor model, multifactor models, CAPM with higher order systematic co-moments, CAPM conditional on market movements and time-varying volatility models. Findings – The paper finds that the last half-century has witnessed the proliferation of empirical studies testing on the validity of the CAPM. A growing number of studies find that the cross-asset variation in expected returns cannot be explained by the systematic risk alone. Therefore a variety of models have been developed to predict asset returns. Research limitations/implications – There is no consensus in the literature as to what a suitable measure of risk is, and consequently, as to what is a suitable measure for evaluating risk-adjusted performance. So the quest for robust asset pricing models continues. Originality/value – From its beginning to its possible demise the paper reviews the history of the CAPM assuring that we are all up to speed with what has been done.