CAPM vs Real-World Investing in India: Why Investors Rarely Use the Model Directly

The Capital Asset Pricing Model (CAPM) is amongst the most commonly taught theories regarding risk and return relationship in finance education; however, despite being central to much of the university coursework associated with finance, it is seldom used directly by individuals making actual investment decisions. The gap between theory and application is particularly well illustrated in India, where there has been considerable growth in both the number of retail investors, the number of mutual funds, and the number of fintech platforms for investment. The purpose of this paper is to understand why CAPM remains a theory, and how investors operate when making investment decisions. In order to explore how individual and institutional investors in India rely more heavily on asset allocation, risk profiles, regulation, and behavioural finance than they do upon CAPM’s expected return calculations, the study examined qualitative case studies of Indian mutual funds, Indian fintech investment platforms, and educational material associated with investment. There are two main conclusions drawn from the findings of the study. First, while CAPM offers an important academic principle for helping to understand market risk, it is used very little in practice because of the simplicity of the assumptions underlying the model. Second, there is a significant difference between textbook finance models and their application in a real-world context, and this is especially true in emerging economies such as India.