Limitations Capital Asset Pricing
Limitations
of capital asset pricing may be explained in terms of perfect market condition,
difficulty in determining the market rate, systematic risk only, and vague
explanation of return.
- 1. Perfect Market Condition
CAPM consider the security
market as perfect market.
- 2. Difficult to Determine Market Rate
CAPM used market rate as a
basic element, however, it is very difficult and complex process to establish
market rate. One rate represents the whole market.
- 3. Systematic Risk
CAPM believes that there
is no unsystematic risk, but this assumption is not valid, because
diversification does not eliminate the unsystematic risk fully.
- 4. No Explains Return
CAPM offers no explanation
on form of return, whether it is dividend, or share price increase. CAPM offer
vague explanation of return.
