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In today's video, NYU Professor Aswath Damodaran explains why he still uses the Capital Asset Pricing Model (CAPM), despite its flaws.
Once again, Damodaran shows a great deal of pragmatism and transparency:
- "any time you try to estimate the future, you are going to be wrong. If you are not ready to accept it, you will never use a model".
- "for me the CAPM is a tool, a means to an end. it does at least a good job like any other model".
- "as long as I don't find anything better, I will always select a model with unrealistic assumptions that I can use, rather than one that makes realistic assumptions no-one can use".
► WHAT I VALUE IN THIS INTERVIEW
It is necessary to consider the conditions under which (the natural domain) models are designed, make sense and ...work! There are assumptions (sometimes killer assumptions), there are trade-offs, there is an ultimate acceptance error to me measured or take into consideration. As I like to say, "all models are wrong, but some are useful".
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► CONTENTS:
00:00 - Intro
00:11 Why do I use the CAPM model, the oldest and might even be flawed
00:21 First critique against the CAPM: it makes unrealistic assumptions
00:44 The Second critique against the CAPM: the parameters might be wrong
01:00 The Third critique: the model does not work very well
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Alex Baroni
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NOTES:
- In the interest of time, the original video interview has been edited.
- Full Credits: NYU professor Aswath Damodaran: / aswathdamodaranonvalua...
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