capm is a "baby model". capm is the simplest of linear models. I guess capm popularity is partly due to this simplicity. 2 big assumptions --

Ass1a: Over 1 period, every individual security has a return that's normal i.e. from a Gaussian noisegen with a time-invariant mean and variance.

Ass1b: there's a unique correlation between every pair of security's noisegen. Joint normal. Therefore any portfolio (2 assets or more) return is normal.

Ass2: over a 2-period horizon, the 2 serial returns are iid.

In the above idealized world, capm holds. (All assumptions challenged by real data.) In real stock markets, these assumptions could hold reasonably well in some contexts.

In the above idealized world, capm holds. (All assumptions challenged by real data.) In real stock markets, these assumptions could hold reasonably well in some contexts.

Expected return is important in the industry. Investors compare expected return. Mark said the expected return will provide risk neutral probability values and enable us to price a security i.e. determine a fair value.

Personally, i don't have faith in any forecast over the next 5 years because I have seen many forecasts failing to anticipate crashes. However, the 100Y stock market history does give me comfort that over 20 years stock mkt is likely to provide a positive return that's higher than the risk-free rate.

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