**Implications and Relevance of Capital Asset Pricing Model**

Capital asset pricing model (CAPM) based on a number of assumptions. Given those assumptions, it provides a logical basis for measuring risk and linking risk and return.

Capital asset pricing model (CAPM) has the following implications,

- Investors will always combine a risk free asset with a market portfolio of risky assets. They will invest in risky assets in proportion to their market value.
- Investors will be compensated only for that risk which they cannot diversify. This is the market related systematic risk. Beta which is a ratio of the covariance between the asset returns and the market returns divided by the market variance is the most appropriate measure of an asset’s risk.
- Investors can expect returns from their investment according to the risk. This implies a liner relationship between the asset’s expected return and its beta.

**Limitations of Capital asset pricing model**

Capital asset pricing model has the following limitations,

- It is based on a number of unrealistic assumptions.
- It is difficult to test the validity.
- Betas do not remain stable over time. (Beta is a measure of a security’s risk).

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