The Theory of Asset Pricing

This assignment explores the theory of asset pricing and mainly focuses on the capital asset pricing model (CAPM). Also, the assignment addresses the CAPM as a model that explains how the projected return on an asset is equivalent to the risk-free rate of return plus a risk premium that is proportionate to the asset's beta. The assignment further evaluates the advantages of the model and explains comprehensively some of the drawbacks that make the model criticized by most researchers. Therefore, criticizing the model led to the rise of other efficient asset pricing models. Hence one of the popular alternative models of the CAPM is the Fama-French model, which accounts for value and size risks to the market risk factor. Lastly, the assignment has analyzed the traditional and non-traditional factors that affect the CAPM.