Limitations of Capital Asset Pricing Model and How Multifactor Approach Overcome it (Essay Sample)

Explain the limitations of the Capital Asset Pricing Model and the extent to which the multifactor approach has overcome these limitations.
1 Introduction
CAPM (Current Asset Pricing Model), the widely used method to monitor the investment performance has generated a lot of debate on its usefulness. The core of the controversy is the contention by Roll (1977) that it is impossible to have a correct and unambiguous CAPM test as observing the true market value of a portfolio is impossible. Thus, the measured risk factor (Beta) for an asset not only depends on the attributes unique to the security but to the proxy used as a representative of the assets universe. Attributing to this impossibility, Roll (1977) further added that theoretically it is possible to generate polarising ranking for the winners and losers if the approximation of the market portfolio is varied. He further argued that any desired measured performance can be produced by judiciously choosing the index.