City Research Online

Abstract

The capital asset pricing model (CAPM) is a widely adopted model in asset pricing theory and portfolio construction because of its intuitive nature. One of its main conclusions is that there exists a global market portfolio that each rational investor should hold in proportion to the risk‐free asset. In this paper, we demonstrate theoretically and through an example that the CAPM cannot hold in a multi‐currency environment. This is because it produces different market risk premia depending on the investor's base currency unless each exchange rate is uncorrelated with the asset prices in the portfolio.

Publication Type:	Article
Additional Information:	© 2025 The Author(s). International Journal of Finance & Economics published by John Wiley & Sons Ltd. This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
Publisher Keywords:	CAPM, multi-currency, risk premia
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Faculty of Finance
SWORD Depositor:	Symplectic Administrator

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