Multi-factor models vs. CAPM

CFA Level II Portfolio Management
#1

Hi guys,

In the study text, we are told that multi-factor models present a much more detailed and richer view of the risks associated with a portfolio compared to the CAPM, because in multi-factor models, we can analyze the different sources of risk as opposed to just the market risk in CAPM. My question is: doesn’t ‘Market Risk’ in the CAPM model include all the risks that multi-factor model takes into account? After all, doesn’t the ‘market’ discount every possible risk it can think of?

Regards,

Sharad

#2

The point of multifactor models is that a specific investment may not have all of the risks seen in the overall market, or it may have them with different exposure levels than in the overall market.

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