The Effectiveness of the Capital Asset Pricing Model in Investment Portfolio Construction

Bc. Kirill Shepelev

Diplomová práce

Abstract:

The Capital Asset Pricing Model remains one of the most widely used tools in portfolio management and investment risk-return assessment. Theoretically, this model explains the dependence of profitability on risk in the simplest way, but in practice this dependence is much more comprehensive. The purpose of this study is to analyse whether an individual investor can form an efficient investment portfolio using CAPM and how such a portfolio compares to the S&P 500 index in terms of risk and return. For this purpose, a portfolio of 30 stocks was created based on expected returns calculated using the CAPM method and industry diversification principles. The selected stocks were valued using key CAPM assumptions, including market beta and risk-free rate. The portfolio's one-year performance was compared to the S&P 500 Index to evaluate whether CAPM-based stock selection could outperform the broader market. The results show that despite its theoretical validity, the CAPM-based portfolio failed to outperform the S&P 500, providing returns of 11.38% versus 14.57% over the selected period, respectively. The results suggest that while CAPM provides a structured approach to estimating expected returns, its practical application is limited by market inefficiencies, industry dynamics, and simplifying assumptions. This study contributes to the ongoing debate on the effectiveness of CAPM in modern portfolio management and emphasizes the importance of integrating alternative asset pricing models or multi-factor approaches when constructing investment portfolios.

Keywords

CAPM, Risk, Return, Portfolio, Investment, Model

Jazyk práce: angličtina

Datum vytvoření / odevzdání či podání práce: 1. 4. 2025

Obhajoba závěrečné práce

• Obhajoba proběhla 30. 5. 2025
• Vedoucí: Ing. Karel Malec, Ph.D.
• Oponent: Robert Koželský, externi

Česká zemědělská univerzita v Praze

Provozně ekonomická fakulta

Magisterský studijní program:
International Trade and Business