The ICAPM contains many of the same assumptions as CAPM, but recognizes that investors may want to create portfolios that contribute to the coverage of uncertainties in a more dynamic way. While the other hypotheses built into the ICAPM (for example. B Comprehensive agreement between investors and a normal multivariate distribution of asset returns) should continue to be tested on your validity, this extension of the theory goes a long way towards modeling a more realistic behavior of investors and allows greater flexibility in terms of efficiency in the markets. As these uncertainties are not included in the beta version of CAPM, the correlation between assets and these risks is not covered. Therefore, beta is an incomplete measure of the risks that may be incurred by investors and will therefore not allow investors to accurately determine discount rates and, ultimately, fair prices of securities. Unlike the only factor (beta) found in CAPM, ICAPM is a multifactorial asset pricing model that allows for the inclusion of additional risk factors in the equation. CAPM is based on a series of simplistic assumptions, some of which are reasonably taken, while others have significant deviations from reality, limiting its usefulness. While hypotheses about theory have always been defined in the scientific literature, many years after the introduction of CAPM, the effects of these hypotheses have not been fully understood. In the 1980s and early 1990s, research revealed anomalies in theory: by analyzing historical equity data, researchers found that small cap actions tended to significantly exceed broad-cap actions, even if they took into account beta differences.
Subsequently, the same type of anomaly was found using other factors, for example.B. To explain these effects, the researchers returned to a theory developed by Robert Merton in 1973 in his paper „An Intertemporal Capital Asset Pricing Model“. The Investment Price Model (CAPITAL M) and its beta calculation have long been used to determine expected asset returns and determine the alpha generated by active managers. But this calculation can be misleading – active managers who advertise positive alpha strategies may take excessive risk that is not taken into account in their analysis and imputation of returns. Investors should understand the Intertemporal Investment Pricing Model (ICAPM) and its extension of effective market theory to avoid the surprise caused by risks they did not even know how to take. (See also: Capital Asset Pricing Model: An Overview.) Public and municipal finances. „The use of CAPM and Fama and the French model has three factors: portfolio selection.“ Access on October 10, 2020. While the ICAPM clearly explains why CAPM does not fully explain asset returns, it unfortunately does little to define precisely what should be taken into account when calculating asset prices. The theory behind CAPM makes it clear that the thing in common with the market presents itself as a determining element of risk that investors should deal with. But the ICAPM has little to say about the details, except that investors can deal with additional factors that influence the amount they are willing to pay for the assets. What these additional specific factors are, how many there are and how much they influence prices is not defined. This open function of the ICAPM has led to more in-depth studies of scientists and professionals who try to find factors by analyzing historical price data.
The quest to find factors that influence asset returns is a big deal. Hedge funds and other investment managers are constantly looking for ways to outperform the market and discover that some stocks outperform others (small cap vs.