Qns:
Discuss the problems that may be encountered in applying the CAPM in investment appraisal.
Ans:
Problems that could have been discussed in connection with applying the CAPM in investment appraisal include:
Ø Determining the excess market return
Ø Determining the risk-free rate of return
Ø Estimation of the equity and overall betas of a company
Ø Determination of the beta for a project
Ø The CAPM is a single-period model
Ø The CAPM is an ex-ante model
Ø National surrogates for market return may be intentionally inappropriate
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