Discussion and Analysis on Financial TheoryContentsA. Capital Asset Pricing ModelB. Advantages and disadvantages of CAPMC. Security market lineD. Systematic and non-systematic riskE. Economic cycleF. Efficient market hypothesisG. Efficient market firms hypothesis H. Selective advertising and stock prices – Discussion in the newspaperQuestion 1:a). Why do financial managers have some difficulty in applying the capital asset pricing model (CAPM) in financial decision making? What benefits does CAPM offer them? .IntroductionThe capital asset pricing model establishes a linear relationship between the required return on an investment and its systematic risk. It helps in theoretical risk-reward evaluation by considering the specific market risk estimated by Beta. The model was introduced by Jack Treynor in 1962, followed by William Sharp, Linter and Mossin as an extension of modern portfolio theory. Structure, Expression and Presentation The capital asset pricing model establishes a linear relationship between the required return on an investment and its systematic risk. It helps in theoretical risk-reward evaluation by considering the specific market risk estimated by Beta. The model was introduced by Jack Treynor in 1962, followed by William Sharp, Linter and Mossin as an extension of modern portfolio theory. The formal or calculation methodology is: RM= Rf + Beta*(Rm-RF)Where,RM = market returnRf = risk-free returnB= beta, which determines the sensitivity of the security in exchange for the market. It takes into account the Security Market Line and establishes the relationship between expected risk and return thus reflecting how the price is determined by the security. The downside... middle of the paper... in a very unrealistic way and we have seen the prices plummeted as investors aggressively shorted the market in a panic. Therefore a new terminology has come for the market needs such as News Traders. These news traders highlight or market the news in such a way as to try to influence market participants to trade on the news. Sometimes we have seen that companies themselves hire such traders and investor relations firms to create a price bubble in the market based on some price-sensitive information. Therefore, in light of the above scenarios, an efficient market hypothesis will not be able to stand as the people responsible for providing the information are psychologically trying to manipulate stock prices. In today's practical world markets are highly perfect and everyone seeks to achieve excess returns in one way or another.