The CAPM, APT, and PAPM

Vol. 23, No. 1, 2025
by Thomas M. Idzorek, Paul D. Kaplan and Roger G. Ibbotson

The Popularity Asset Pricing Model (PAPM) generalizes the Capital Asset Pricing Model (CAPM) with popularity as the basis for multiple priced characteristics. The CAPM along with the Arbitrage Pricing Theory (APT) are the dominant textbook asset pricing models. Both require restrictive and unrealistic assumptions. The former suffers empirical shortcomings, and the latter is largely unused. Fama and French (2007) identify “tastes” and “disagreement” as impacting asset prices. In the PAPM, investors have a variety of risk and non-risk preferences (tastes) and divergent beliefs about expected returns and risk (disagreement), in which aggregate tastes and disagreement impact equilibrium prices.