One basic problem with the application of the Capital Asset Pricing Model when computing K_e is that

Question

Quizplus · Accepted Answer

K_e requires estimating the expected return of an asset given its systematic risk (beta) and the market risk premium. The formula includes the difference between the expected return of the market (K_m) and the risk-free rate (R_F), which is not directly observable in the market. Therefore, this is a major limitation of using the Capital Asset Pricing Model to compute K_e.

One Basic Problem with the Application of the Capital Asset