CAPM: an absurd model
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Pablo Fernandez, Professor of Finance. IESE Business School, University of Navarra 
e-mail: fernandezpa@iese.edu. Camino del Cerro del Aguila 3. 28023 Madrid, SpainNovember 3, 2014 

On October 2014, I sent the article "CAPM: an absurd model" to several professors, professionals and Ph.D. students, 
telling them that "I will appreciate very much your opinion and criticism". I thank very much all that answered the about 300 
interesting comments and criticism that follow. I have learned a lot reading (and thinking about) all of them because are real 
opinions of real persons that know finance and have thought about it. 

The CAPM is about expected return. If you find a formula that works well in the real markets, would you 
publish it? Before or after becoming a billionaire? 

The CAPM is an absurd model because not only its assumptions but also its predictions/conclusions have no 
basis in the real world. (Absurd means 1. ridiculously unreasonable, unsound, or incongruous <an absurd argument>. 2: 
having no rational or orderly relationship to human life. Meaningless. utterly or obviously senseless, illogical, or untrue; 
contrary to all reason or common sense; laughably foolish or false. (Source: http://www.merriamwebster.
com/dictionary/absurd) 

With the vast amount of information and research that we have, it is quite clear that the CAPM is neither a 
theory nor a model because it does not "explain facts or events", nor does it "describe the past, present, or 
future state of something". 

The use of CAPM is also a source of litigation. Users of the CAPM make many illogical errors valuing 
companies, accepting/rejecting investment projects, evaluating fund performance, pricing goods and services in 
regulated markets, calculating value creation...

It is important to differentiate between a fact (something that truly exists or happens: something that has 
actual existence; a true piece of information) and an opinion (what someone thinks about a particular thing). 
The CAPM could be described as an uninformed opinion, and not as a sensible opinion. 

We may find out an investor's expected return for IBM by asking him. However, it is impossible to 
determine the expected return for IBM of the market, because this parameter does not exist. Different investors 
have different cash flow expectations and different expected (and required) returns to equity. One could only 
talk of the expected return of the market if all investors had the same expectations. But investors do not have 
homogeneous expectations. 

Valuation is about required return. There are persons, papers and books that mix (or assume that are equal) 
expected and required returns. 
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