APPLICATION OF THE CAPITAL ASSET PRICING MODEL IN FINANCIAL MANAGEMENT: IMPLICATIONS FOR INVESTMENT DECISION-MAKING

Abstract

Research objective: Assess how the capital asset pricing model (CAPM) is used in financial management, with a focus on investment decision‑making in emerging markets. The study asks whether the model’s simple risk–return relationship still provides a reliable benchmark for corporate finance and portfolio management.

Research method: Conduct an analytical review of academic literature from the past five years and perform a hypothetical empirical demonstration using secondary data from the Baku Stock Exchange. The example involves constructing monthly return series for five Azerbaijani firms (2019–2023), estimating beta coefficients via ordinary least squares regression and computing expected returns using the CAPM formula.

Research findings: CAPM remains a practical starting point for estimating the cost of equity and guiding portfolio choices. However, its assumptions—perfect markets, homogeneous expectations and unlimited borrowing at the risk‑free rate—are seldom met in practice. Empirical evidence shows that beta values can fluctuate over time and that size, value and momentum effects reduce the model’s explanatory power. In the Azerbaijani illustration, CAPM‑based expected returns sometimes diverge from realised returns, indicating that macroeconomic and firm‑specific factors should be incorporated. Managers should use CAPM as a baseline while supplementing it with multifactor models and scenario analysis.