
476 INTERNATIONAL FINANCIAL MANAGEMENT
is known as domestic CAPM, thus becomes the international CAPM when a global market
portfolio is built into the model.
Researchers in recent years have observed that the CAPM as developed by William
Sharpe and John Lintner is appropriate only for a closed economy. In other words, the
domestic CAPM is not appropriate when there are interactions among the financial markets
of various countries. When funds flow across countries, the market portfolio under CAPM
cannot capture all the systematic risk, because the foreign exchange risk, which is an impor-
tant factor in international investments, is not built into ...