Critique the relevance and validity of applying the capital asset Essay

Critique the relevance and validity of applying the capital asset pricing model in the context of investment choices - Essay Example Undeniably, the CAPM model rules out active investment and management research, and therefore abolishes many applications merely by using a pen, by virtue of the idealistic assumptions made by it (Perold, 2004). Some common applications often depend on the correctness of the modest CAPM, or rather the extensions in defining equilibrium returns. In fact, an imprecise understanding of the market portfolio may not be a vital factor in this. The approximated investment portfolio maintain an essential role in the reconstructed submission that arise from realization of the falsehood of CAPM. In this sense therefore, the application of this model to investment choices can have meaning only on condition that CAPM is false. The conclusion can be that the investment portfolio seems to play a natural role, making possible specifications errors to be unimportant (Shanken,