The traditional CAPM can be used in various ways, depending on which parameters are used in the equation. For instance, in some models the risk free rate that is used is the global risk free rate (the 10-year US Treasury note), in others a local risk free rate is used. These variations have lead to different models that are differently applicable. Hereafter several versions of the traditional CAPM model will be described.
The Global CAPM
Investors that believe in market integration could apply the Global CAPM, also known as the World CAPM, to emerging markets (O’brien, 1999; Stulz, 1999). This model is based on the idea that an investor located anywhere in the world could rapidly enter and leave any market, incurring minimum transaction costs (Pereiro, 2001). The global CAPM is in fact similar to the traditional CAPM, but is denoted here in order to clarify the input parameters. The expected return in the Global CAPM is defined by the following formula:
is the systematic risk of asset relative to the global market portfolio, in other words, the local company beta computed against a global market index.
