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Applied International Finance II, Second Edition by Thomas O'Brien

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CHAPTER 2

The International CAPM

Although the global CAPM (GCAPM) is the simplest risk and return model for internationally integrated financial markets, the GCAPM is not always the best model to use. You will see in this chapter that the GCAPM is a reasonable risk–return model from the US dollar perspective and perhaps from the perspective of a few other currencies as well. For many other currencies, on the other hand, one may want to apply instead the version of the international CAPM (ICAPM) introduced in this chapter.

Introduction to the Two-Factor ICAPM

Whereas the local CAPM and the GCAPM each have only one risk factor, the ICAPM version introduced in the following has two risk factors: (1) the global market index; and (2) a foreign currency ...

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