CAPM — Theoretical Limitations

Within the model structure of the capital asset pricing model (CAPM), a limitation is that the CAPM:

Correct. This is a limitation of CAPM. It is a single factor model as it only considers the market as its variable. Multi-factor models are available. They incorporate additional risk factors that may also apply to a particular asset and can likely provide improved understanding between risk and return.

Incorrect. CAPM is not designed to capture variable risk factors. Having the ability to do so would be an advantage, not a limitation.

Incorrect. This is not a limitation because CAPM does not incorporate those risks that have the ability to be eliminated through portfolio diversification.

is a single factor model.

captures variable risk factors.

incorporates only unsystematic risk.