Domestic CAPM and Extended CAPM

Domestic CAPM

An efficient market allows investors to diversify away company/security specific risk and have exposure solely to the market risk.
The Capital Asset Pricing Model (CAPM) as previously discussed was considered purely from an investor's domestic point of view.
Domestic CAPM: Theoretic technique for an investor that can be used to price market/systemic risk exposure of assets denominated in his/her own currency.
Domestic CAPM: Local Currency of Asset = Domestic Currency of the Investor
The domestic CAPM can only price local market risk.
Internationally, the domestic CAPM fails to consider:
Global market risks. Ex: Only the U.S. market risk is important in pricing Wal-Mart common equity shares.
Exchange rate risk.

Extended CAPM: Extends domestic CAPM to pricing systemic risk adjusted security returns to a world market portfolio of investible assets.

**Domestic CAPM formula:

E(RiLC) = RFLC + βiLC[E(RMLC) - RFLC]**

E(RiLC) = Domestic return for global asset "i", as measured in the asset's local currency
RFLC = Risk-free rate of return in the investor's domestic currency
E(RMLC = Expected return of the domestic market portfolio, used in calculating the domestic market risk premium, where the domestic currency is the local currency for the market.
βiLC = The asset's beta, its sensitivity to domestic market returns, where the investor's domestic currency is the local currency

**Extended CAPM formula:

RiDC = RFDC + βiDC[E(RWDC) - RFDC]**

RiDC = Return for risky global asset "i" measured in investor's domestic currency
RFDC = Global risk-free asset's rate of return in the investor's domestic currency.
RWDC = Return on world market of investible assets in the investor's domestic currency; used in calculating the world market risk premium in the investor's domestic currency.
βiDC = The global asset's beta, its sensitivity to world market returns, in the investor's domestic currency