Report to the AER - Alternative Asset Pricing Models - 30 June 2020

On Thursday 27 August 2020 the AER published our draft working paper on CAPM and alternative return on equity models. The working paper seeks to:

• Compare and evaluate the strengths and weaknesses of the Capital Asset Pricing Model (CAPM) and a number of alternative return on equity models.
• Identify options for how these model/s might be used.
• Seek submissions on the use of these models to inform the return on equity.

To help us understand finance theory and practice, we commissioned expert advice from Professors Graham Partington and Stephen Satchell.

There are areas of overlap between this paper and our second draft working paper, on International regulatory approaches to the rate of return. We have published the two working papers simultaneously (together with the expert reports accompanying each) so that stakeholders can consider the links between them.