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Capital asset pricing model
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Search complete. 49 mentions across 19 episodes found for "Capital asset pricing model".
Oct 2, 2026
Aswath DamodaranHOST
Remember, we talked about the expected return on a stock.
Aswath DamodaranHOST
We used the CAPM and all those elaborate models to get there.
Aswath DamodaranHOST
I think for Disney, it was, what, 9% was the expected return.
Aswath DamodaranHOST
Some of that return will come from dividends, some from price appreciation.
Chris WilliamsGUEST
Yeah.
Chris WilliamsGUEST
I just remember during the interview, I was trying so hard to sell myself like I could do the job, and I was, you know, throwing out like, "Oh, I could do CAP M and I...
Chris WilliamsGUEST
We can do Phish and Frontier." And they were like, "It's okay, Chris, just like stop talking." It was like, "You're fine." [laughs]
Brian BagilaHOST
[laughs] Exactly.
Étienne Joncas-BouchardHOST
Um, no, honestly, that was, that was great.
Étienne Joncas-BouchardHOST
And, and, and it really does explore, like we... 'Cause you went back to CAPM and, like, kind of like the initial, like, you take on more risks, you get paid for it.
Étienne Joncas-BouchardHOST
It's, it's kind of like a, a concept that I think most people would understand.
Étienne Joncas-BouchardHOST
It's kind of like you're increasing your potential payout, but it's, uh ...
Aswath DamodaranHOST
The risk of a stock then becomes a risk added to this market portfolio, and that risk is captured with a single BATEM.
Aswath DamodaranHOST
The CAPM, of course, was the first model to come up with an explicit way of connecting risk to expected returns in modern portfolio theory.
Aswath DamodaranHOST
And in 1964, when it came out, it was viewed as a godsend, a way of estimating expected returns, costs of equity, based on the risk of that equity.
Aswath DamodaranHOST
Of course, it makes some very strong assumptions.
Aswath DamodaranHOST
Multi-factor models basically put names on the factors.
Aswath DamodaranHOST
What they do is they bring in macroeconomic names to each of the factors and estimate betas against each one.
Aswath DamodaranHOST
So you've got the CAPM, where the risk is measured with one beta, the arbitrage pricing model, where the risk is measured with multiple betas against unspecified factors, and multi-factor models, which allow for multiple sources of market risk which are named and betas against each one.
Aswath DamodaranHOST
All of these models, though, stem from modern portfolio theory.
Aswath DamodaranHOST
And it's not just practitioners, it's academics as well.
Aswath DamodaranHOST
If you look at all of the theory that you use in discounted cash flow evaluation, all of the theory that's been developed by academics over the last 50 or 60 years, I would argue that 90 to 95%, perhaps even more of the papers, the research done on discounted cash flow evaluation is about the D in the discounted cash flow evaluation, the CAPM, the arbitrage pricing model, the modern portfolio theory model.
Aswath DamodaranHOST
In fact, I would argue that when academics talk about asset pricing, they're almost always talking about how to get discount rates right.
Aswath DamodaranHOST
Why? Because it's so much easier to develop great theory on discount rates than it is on cash flows.
Aswath DamodaranHOST
So this is across about seven thousand four hundred publicly traded US companies.
Aswath DamodaranHOST
Cost of capital for each company using the risk-free rate at that point in time, and a risk premium and a beta reflecting what business is there.
Aswath DamodaranHOST
And so I'm basically sticking with the traditional CAPM to get my cost of equity.
Aswath DamodaranHOST
But I'll wager that the distribution is not going to look that different if I use the arbitrage pricing model or a multi-factor model.
Alex PartonHOST
If you haven't heard that one, go back and give it a listen.
Alex PartonHOST
Roger walked us through the limitations of CAPM and made the case for thinking about risk in the terms of actual cash flows in front of you.
Alex PartonHOST
Today, we're pushing further into one of the toughest pieces of that puzzle.
Alex PartonHOST
How does subject entity risk actually get identified? And once it's identified, where does it belong inside a valuation? That second question, where it belongs, turns out to be a lot harder than it sounds and sits right at the center of one of the most contested topics in valuation, the company-specific risk premium, or CSRP.
Alex PartonHOST
There's no accepted formula for calculating a CSRP, and if you talk to practitioners, a lot of them might tell you they've been trained to stay vague, to talk about risk factors in the narrative of a report without ever assigning a specific value to a specific factor.
Alex PartonHOST
That's not a comfortable place for a profession to be, especially once these numbers get tested in a courtroom.
Alex PartonHOST
And underneath all of that sits a real theoretical tension, modern finance theory, CAPM.
Alex PartonHOST
It says risk that's unique to one company shouldn't be priced at all because an investor can just diversify it away.
speaker_3HOST
Exactly.
speaker_3HOST
Furthermore, mathematical models like the Capital Asset Pricing Model or CAPM, they cannot price in an investor's specific liabilities.
speaker_2HOST
They don't know who is holding the bag.
speaker_3HOST
Right.
Aswath DamodaranHOST
Pretty legitimate.
Aswath DamodaranHOST
The other half latched on to one of those fundamental assumptions we make in the CAPM, which is, or any risk and return model in finance, which is that the marginal investor is diversified, that you should measure only the risk you cannot diversify away.
Aswath DamodaranHOST
So the second half said, I don't have a problem with the price-based measure, but I have a problem with this marginal investor being diversified because we, if you think about old-time value investing, you're told to have concentrated portfolios.
Aswath DamodaranHOST
Buy just five or six companies.
Aswath DamodaranHOST
in your assumption.
Aswath DamodaranHOST
The third approach is kind of a melded approach.
Aswath DamodaranHOST
You start with a CAPM.
Aswath DamodaranHOST
Why? Because it's there.
Aswath DamodaranHOST
from 1964 through 1978 was the only game in town.
Aswath DamodaranHOST
Late 70s, you saw the arbitrage pricing model, where instead of having one market risk factor and one beta, you allowed for multiple market risk factors, still in the same dimension as the CAPM and different betas.
Aswath DamodaranHOST
The only problem with the arbitrage pricing model is you never named those factors.
Aswath DamodaranHOST
There were statistical factors, factor one, factor two, factor three, factor four, factor five.
Aswath DamodaranHOST
In every one of these models, you start with the risk free rate, that's a given.
Aswath DamodaranHOST
In every one of these models, you need a beta.
Aswath DamodaranHOST
In the CAPM, you need one market beta.
Aswath DamodaranHOST
In the arbitrage pricing model and multi-factor models, you need multiple betas.
Aswath DamodaranHOST
The second is both bankers throw discount rates at me, 10 to 12, 9 and up.
Aswath DamodaranHOST
They all use buzzwords, CAPM, cost to capital, debt ratio.
Aswath DamodaranHOST
I'm going to give them the benefit of the doubt that they've actually computed the risk-free rate, the beta, the risk premium, the debt ratio, the cost of debt, right? I seriously doubt it because looking at their numbers, they don't look right.
Aswath DamodaranHOST
But I'll give them, I'll assume that it's just differences in judgment.
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