Criticisms of the CAPM

[@finimits]

My goodness. You really are an absolutely brilliant teacher! Saw one of your videos on CAPM, and I was just hooked! Thank you so much!

[@davidhillier9986]

Thanks!

[@TheFinanceStoryteller]

Thank you for emphasizing ex-ante versus ex-post. In my view, that completely wipes out any usefulness of CAPM. Historical covariance is no guarantee for the future. More specifically: extreme events are more common than a normal distribution would imply. Reading “The Black Swan” by Nassim Taleb will fully clarify this point.

[@johnoliver4664]

The Finance Storyteller, hi there. Your videos have also been as helpful. Nice to see you here. What alternate method would you use to work out the cost of equity?

[@TheFinanceStoryteller]

@@johnoliver4664 I would suggest to forget about cost of equity and CAPM altogether! If you use CAPM, you are using a Gaussian distribution ("bellcurve") on something that is of a Pareto nature (powerlaws). Mild variation vs wild variation.

[@johnoliver4664]

The Finance Storyteller I’d like to know your chosen method on valuing stocks, perhaps you could do a step by step video on it in the future as well as other methods. But if you’ve done so I’d like to see the link. Thanks. What are your thoughts on tweaking the WACC formula by taking out the cost of equity calculation & replacing it with a more preferable one? 🤔

[@TheFinanceStoryteller]

@@johnoliver4664 Good questions! I don't value stocks. I built my own (modest) stock market portfolio based on my personal interpretation of Nassim Taleb's "barbell strategy": some of my money in ETFs on stock and bond indices, some of my money on stocks with a convex payoff potential (software, biotech). I disclose my portfolio in a video called "What is an ETF". The only time I refer to WACC is when I discuss evaluating CapEx investments with participants in one of my "finance for non-financial managers" courses. But then I prefer to use the (higher treshold) hurdle rate approach based on risk profile heuristics (as you proposed: a "tweak"), rather than the flawed CAPM-WACC approach. I explain the difference in a video called "WACC vs hurdle rate".

[@johnoliver4664]

The Finance Storyteller Very Interesting. I’m Gonna check your portfolio in your ETF video & also research this “barbell strategy” & afterwards checkout your course. Cheers

[@janicevic2786]

It is very clear with the Scottish accent. thanks, Professor Hiller.

[@robertfeather610]

So helpful for my chartered exam coming up. Thanks David

[@davidhillier9986]

You're welcome!

[@maiadeldarwish6824]

Hello Mr David , did you read about the statistical drawbacks of CAPM ?!

[@berelowitz94]

would have loved to have had you as a lecturer - thanks for the help.

[@davidhillier9986]

Thanks!

[@sillylun520fung3]

thank you for uploading it really helps

[@davidhillier9986]

Thanks for the kind comments.

[@diegofujiana6600]

Thank you!

[@m051f]

you're an absolute legend

[@davidhillier9986]

+m051f Thanks!

[@discountmethodinyi-jing148]

I ask you a key question: Ra = Rf + Beta * (Rm - Rf) Ra = 5% with price of stock a $15 Rf = 3% with market value of bond market $100*10^6 Rm = 7% with market value of stock market $100*10^9 and Beta = 0.5 So, CAPM is relative equilibrium, i.e. 5% = 3% + 0.5 * (7% - 3%), and it is wondered how to exchange stock return Ra for stock profits $Ra for real capital asset pricing? In reality, this is a key mistake of CAPM.

[@VangelVe]

When bankrupt governments issue securities do we really have a risk-free situation? And doesn't all of this need equilibrium conditions to dominate what are very noisy and chaotic markets?

[@maiadeldarwish6824]

i read about ( Baysian theory) which assume that there is no risk free asset !

[@mustafaabohari3853]

I love the Scottish accent ::)

[@BENBENYOUNGYOUNG]

Good, but I have to listen on 1.5x speed.