Exploring the International Capital Asset Pricing Model | Analytical Essay

The International Capital Asset Pricing Model

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Introduction  

The Capital Asset Pricing Model (CAPM) was initially developed by Sharpe (1964) and Lintner (1965) which received a Nobel Prize in 1990. This model was built from the work of Harry Markowitz in 1952 where he wrote a “portfolio selection” article in which he included the analysis of the risks involved when choosing a portfolio. This model of the portfolio is also known as the “mean-variance model” (Elbannan, 2014, p.216). It mainly focuses on how investors choose portfolios based on variance and the expected returns. The framework developed by Markowitz has the assumption that investors are efficient, against risks and maximize their utility which is the reason why the portfolio selection highly depends on investors risk-return benefits function. This means that investors only choose a portfolio for…