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1.Nevertheless, investors, analysts, and corporate finance specialists continue to rely heavily on CAPM as a fundamental framework for contemporary portfolio theory.Portfolio Optimisation: According to the Capital Asset Pricing Model (CAPM), investors might hold a diversified portfolio of hazardous assets in proportion to their market capitalizations in order to attain the best risk-return trade-off.Cost of Capital: Businesses utilise the Capital Asset Pricing Model (CAPM) to calculate their cost of equity, which is a crucial factor in capital budgeting choices and the assessment of investment initiatives.This is how index investing works.2.3.4.


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  1. Asset Valuation: Based on an asset's degree of systematic risk, the CAPM framework may be used to calculate its expected return and fair value. This can assist in locating assets that are overpriced or undervalued.




  2. Portfolio Optimisation: According to the Capital Asset Pricing Model (CAPM), investors might hold a diversified portfolio of hazardous assets in proportion to their market capitalizations in order to attain the best risk-return trade-off. This is how index investing works.




  3. Cost of Capital: Businesses utilise the Capital Asset Pricing Model (CAPM) to calculate their cost of equity, which is a crucial factor in capital budgeting choices and the assessment of investment initiatives.




  4. Market Efficiency: Since CAPM is predicated on the idea that markets are efficient, it follows that active stock selection and market timing are unlikely to consistently outperform once risk has been taken into consideration.




Though helpful, the CAPM model has many drawbacks, including the assumption of efficient markets, its dependence on historical data, and the challenge of precisely estimating model parameters. Nevertheless, investors, analysts, and corporate finance specialists continue to rely heavily on CAPM as a fundamental framework for contemporary portfolio theory.


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