Talk:Capital asset pricing model

I think two of the shortcomings are not quite right.

"The model assumes that all investors are risk averse. Some investors (e.g., some day traders), however, can not be considered to be risk averse."

A central idea of the model is that a day trader and a retiree can use the same pricing model, because they can assemble a portfolio that matches their different risk objectives and they can observe the market price for risk.

All the model assumes is that 1) higher returns are preferred to lower returns and 2) lower risk is preferred to higher risk.

In other words, if you offer a day trader two assets -- one highly risky asset and one lower risk asset -- with the same expected return, the day trader will pick the lower risk asset.

One can argue that the model assumes that investor behavior is rational (and that that is a shortcoming).

"The model assumes that all investors create mean-variance optimized portfolios. However, there are many investors who don't know what a mean-variance optimized portfolio is."

Again, the only thing the model assumes is that 1) higher returns are preferred to lower returns and 2) lower risk is preferred to higher risk.

Variance is used as a measure of observed risk. There is no assumption that investors are using the model.

Like gravity, you don't need to know :$F=G{\frac {m_{1}m_{2}}{r^{2}}}$ for it to work.

If no objections, I will remove these shortcomings. Thoughts? -Chris vLS 20:52, 10 Dec 2004 (UTC)

I agree with you, especially about the day traders. Whoever wrote this sentence confused willingness to accept risk with an actual DESIRE for risk. Evel Knievel was not a day trader. Furthermore, its been 2 weeks since you asked this question and nobody has sought to defend these passages yet, so ... let's roll! --Christofurio 00:43, Dec 22, 2004 (UTC) Done! Thanks for the encouragement! --Chris vLS 16:01, 22 Dec 2004 (UTC)