Comparison and Contrast of Pricing Model In this article, I will discuss the growth and development of the Capital Asset Pricing Model (CAPM). I will also identify and analyze the different applications of the CAPM. . I will try to illustrate how the model can be used to form measures of expected return and valuation. These illustrations will be informed by examples of stock options and restricted stock. Finally, I will conduct a comparative analysis of the associated potential outcomes and comparative benefits and risks of using the CAPM versus Arbitrage Pricing Theory (APT). Evaluation of the development of the capital asset pricing model (CAPM) How does the risk of an investment affect its expected return (Perold, 2004)? According to Perold (2004), the capital asset pricing model (CAPM) was the first coherent framework developed by Sharpe, Lintner and Mossin in 1964, 1965 and 1966 respectively to answer this question. The fundamental principle of CAPM is that not all risks should affect the price of an asset, particularly risks that can be diversified away when held alongside other investments in a portfolio, cease to be risks (Perold, 2004). The original CAPM was designed in an imaginary framework. space, where the following hypotheses regarding investors and opportunities were formulated (Shih, Chen, Lee & Chen, 2014). First, risk-averse investors will maximize the expected return on their wealth (Shih et al, 2014). Second, price-taking investors have homogeneous expectations about the joint returns of normally distributed assets (Shih et al., 2014). Third, there is an unlimited amount of risk-free assets that investors can lend and borrow at a risk-free rate (Shih et al., 2014). ., 2014).Fourth, there is a fixed amount of uniformly divisible and tradable assets (S...... middle of paper ......roquest.com.proxy1.ncu.edu/docview/208162617? accountid =28180Perold, AF (2004).The financial assets model, Journal of Economic Perspectives,18(3),3-24. Retrieved from http://www-personal.umich.edu/~kathrynd/JEP.Perold. pdfRoll, R. & Ross, SA (1980). An empirical investigation of the theory of arbitrage pricing. Journal of Finance, 35(5), 1073-1103. arbitrage: is it testable. Journal of Finance,37(5), 1129-1140Shih, Y., Chen, S., Lee, C. and Chen, P. (2014). Financial Assets Review, 42(3), 415-448 doi:10.1007/s11156-013-0348-xTabak, D. (2002). discount for illiquidity. NERA Economic Consulting Retrieved from http://www.nera.com/extImage/5657.pdfWei, K. (1988). Finance Journal, 43(4), 881