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3.5Investment Foundations · Mission 4

Choosing a Risk Measure

Challenge CAPM at its boundaries, compare competing risk methods, and choose a method because it fits the investor's question.

Your mission

Match theory, accounting, proxy, market-implied, cash-flow, and margin-of-safety approaches to the decisions they can support.

Compare the methods →

22–25 minutesFive guided missionsTwo chosen risk methods

Guided equity-risk lab

0 of 5 missions complete

OPS Guide

CAPM is one theory-based answer to one risk question. Inspect its assumptions, noisy inputs, and limited empirical explanatory power.

Open all three limitations before comparing alternatives.

Mission 1 of 5 · Challenge

State CAPM's limitations

Model status

CAPM is a theory-based model that prices market exposure for a diversified investor. Its usefulness depends on its assumptions, estimated inputs, and the question being asked.

Open all three limitations. The goal is to understand CAPM’s boundary, not to discard the model automatically.

Strong assumptions

Evidence

The model assumes investors can diversify and share a common market-risk framework.

Decision consequence

The result is conditional on a simplified model of investor behavior and markets.