1.

The Capital Asset Pricing Model: Theory and Evidence

Eugene F. Fama
University of Chicago - Finance

Kenneth R. French
Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)
August 2003
CRSP Working Paper No. 550; Tuck Business School Working Paper No. 03-26
Abstract:
The capital asset pricing model (CAPM) of William Sharpe (1964) and John Lintner (1965)
marks the birth of asset pricing theory (resulting in a Nobel Prize for Sharpe in 1990).
Before their breakthrough, there were no asset pricing models built from first principles
about the nature of tastes and investment opportunities and with clear testable
predictions about risk and return. Four decades later, the CAPM is still widely used in
applications, such as estimating the cost of equity capital for firms and evaluating the
performance of managed portfolios. And it is the centerpiece, indeed often the
only asset pricing model taught in MBA level investment courses.
The attraction of the CAPM is its powerfully simple logic and intuitively pleasing
predictions about how to measure risk and about the relation between expected return
and risk. Unfortunately, perhaps because of its simplicity, the empirical record of
the model is poor - poor enough to invalidate the way it is used in applications.
The model's empirical problems may reflect true failings. (It is, after all, just a model.)
But they may also be due to shortcomings of the empirical tests, most notably, poor
proxies for the market portfolio of invested wealth, which plays a central role in
the model's predictions. We argue, however, that if the market proxy problem invalidates
tests of the model, it also invalidates most applications, which typically borrow the
market proxies used in empirical tests.
For perspective on the CAPM's predictions about risk and expected return, we begin with
a brief summary of its logic. We then review the history of empirical work on
the model and what it says about shortcomings of the CAPM that pose challenges to be
explained by more complicated models.

Fama, Eugene F. and French, Kenneth R., The Capital Asset Pricing Model: Theory and Evidence (August 2003).
CRSP Working Paper No. 550; Tuck Business School Working Paper No. 03-26. Available at
SSRN:http://ssrn.com/abstract=440920 or http://dx.doi.org/10.2139/ssrn.440920

2.

The Capital Asset Pricing Model: Some Empirical Tests

3.

4. Michael C. Jensen
5.
Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau
of Economic Research (NBER); European Corporate Governance Institute (ECGI)

6. Fischer Black
7.
Sloan School of Management, MIT

8. Myron S. Scholes
9.

Stanford Graduate School of Business; Platinum Grove Asset Management L.P.; Oak Hill
Platinum Partners, LLC
Michael C. Jensen, STUDIES IN THE THEORY OF CAPITAL MARKETS, Praeger Publishers
Inc., 1972
10.
Abstract:
11. Considerable attention has recently been given to general equilibrium models of
the pricing of capital assets. Of these, perhaps the best known is the meanvariance formulation originally developed by Sharpe (1964) and Treynor (1961),
and extended and clarified by Lintner (1965a; 1965b), Mossin (1966), Fama
(1968a; 1968b), and Long (1972). In addition Treynor (1965), Sharpe (1966), and
Jensen (1968; 1969) have developed portfolio evaluation models which are either
based on this asset pricing model or bear a close relation to it. In the development
of the asset pricing model it is assumed that (1) all investors are single period
risk-averse utility of terminal wealth maximizers and can choose among portfolios
solely on the basis of mean and variance, (2) there are no taxes or transactions
costs, (3) all investors have homogeneous views regarding the parameters of the
joint probability distribution of all security returns, and (4) all investors can borrow
and lend at a given riskless rate of interest. The main result of the model is a
statement of the relation between the expected risk premiums on individual
assets and their "systematic risk." Our main purpose is to present some additional
tests of this asset pricing model which avoid some of the problems of earlier
studies and which, we believe, provide additional insights into the nature of the
structure of security returns.
The evidence presented in Section II indicates the expected excess return on
an asset is not strictly proportional to its B, and we believe that this evidence,
coupled with that given in Section IV, is sufficiently strong to warrant rejection of
the traditional form of the model given by (1). We then show in Section III how the
cross-sectional tests are subject to measurement error bias, provide a solution to
this problem through grouping procedures, and show how cross-sectional methods
are relevant to testing the expanded two-factor form of the model. We show in
Section IV that the mean of the beta factor has had a positive trend over the
period 1931-65 and was on the order of 1.0 to 1.3% per month in the two sample
intervals we examined in the period 1948-65. This seems to have been
significantly different from the average risk-free rate and indeed is roughly the
same size as the average market return of 1.3 and 1.2% per month over the two
sample intervals in this period. This evidence seems to be sufficiently strong
enough to warrant rejection of the traditional form of themodel given by (1). In
addition, the standard deviation of the beta factor over these two sample intervals
was 2.0 and 2.2% per month, as compared with the standard deviation of the
market factor of 3.6 and 3.8% per month. Thus the beta factor seems to be an
important determinant of security returns.
12. Number of Pages in PDF File: 54

Jensen, Michael C. and Black, Fischer and Scholes, Myron S., The Capital Asset Pricing Model: Some Empirical
Tests. Michael C. Jensen, STUDIES IN THE THEORY OF CAPITAL MARKETS, Praeger Publishers Inc., 1972.
Available at SSRN: http://ssrn.com/abstract=908569

3.

CAPM and Time-Varying Beta: The Cross-Section of Expected

Returns
Devraj Basu
Universit Lille Nord de France - Skema Business School

Alexander Stremme
University of Warwick - Finance Group
March 2007
Abstract:
The failure of the static-beta CAPM to explain the cross-section of returns on portfolios
sorted on firm size, book-to-market ratio, momentum, and even portfolios sorted on past
CAPM betas, is well documented. In this paper we show that the model's performance
dramatically improves when portfolio betas are allowed to be time-varying functions of
(lagged) business cycle variables. We use an approach based on Hansen and Richard
(1987) to construct a candidate stochastic discount factor (SDF), using the excess return
on the market portfolio as the single factor, scaled by a time-varying coecient. The
result is a model in which the conditional factor risk premium is a non-linear function of
the business cycle variables. We assess the performance of our model by computing the
R2 of the cross-sectional regression of realized on model-implied expected returns, as for
example in Jagannathan and Wang (1996). While this is not a formal test of the model's
ability to price the assets correctly, it does provide an informative summary statistic that
allows us to compare the performance of our scaled modelwith that of the static version,
and also to compare our findings to those of other similar studies.
In the post-1980 period, where the static CAPM is known to perform particularly poorly,
our scaled model explains around 60% of the cross-sectional variation in returns on beta
and book-to-market portfolios, and 87% for momentum portfolios. Moreover,
the model captures 70% of the value premium (the return spread between the highest
and lowest book-to-market decile portfolios), and 75% of the momentum premium (the
spread between the past 'winner' and 'loser' portfolios). Our results thus confirm the
crucial importance of time-varying risk premiums in explaining the cross-section of
average returns on these sets of portfolios. Moreover, the conditional market risk
premium and hence also the betas implied by ourmodel exhibits considerable nonlinearity in the business cycle instruments.
Number of Pages in PDF File: 30
Keywords: Capital Asset Pricing Model, Time-Varying Risk Premium
Basu, Devraj and Stremme, Alexander, CAPM and Time-Varying Beta: The Cross-Section of Expected Returns
(March 2007). Available at SSRN: http://ssrn.com/abstract=972255 or http://dx.doi.org/10.2139/ssrn.972255

4.

Beta and Returns Revisited: Evidence from the German Stock

Market
Ralf Elsas

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of

Management)

Mahmoud El-Shaer
Salomon Brothers International Ltd.

Erik Theissen
University of Mannheim - Finance Area
December 1999
Abstract:
The Capital Asset Pricing Model (CAPM) predicts that the expected return on a stock
depends on its systematic risk as measured by its beta. However, recent empirical
evidence suggests that the relation between beta and realized returns is weak or even
non-existent. The traditional two-step procedure due to Fama / MacBeth (1973) used in
most studies implies a test of two joint hypotheses. The hypothesis that there is a
positive relationship between beta and realized return is tested jointly with the
hypothesis that the average market risk premium is positive.
Pettengill / Sundaram / Mathur (1995) proposed a procedure that allows to independently
test the hypothesis of a relation between beta and realized returns. The procedure makes
use of the fact that the ex-post formulation of the CAPM used in the empirical tests
predicts a conditional relation between beta and expected returns. Stocks with a higher
beta should have higher [lower] realized returns when the market risk premium is
positive [negative]. We perform Monte Carlo simulations that show that the conditional
test reliably identifies the relation between beta and return.
In an empirical examination for the German stock market we find a positive and
statistically significant relation between beta and return in our sample period 1960-1995
as well as in all subperiods we analyze. The reason why previous studies did not identify
this relationship is likely to be the fact that the average market risk premium in the
sample period was close to zero. Our empirical results provide a justification for the use
of betas estimated from historical return data by portfolio managers.
Number of Pages in PDF File: 32
Elsas, Ralf and El-Shaer, Mahmoud and Theissen, Erik, Beta and Returns Revisited: Evidence from the German
Stock Market (December 1999). Available at
SSRN: http://ssrn.com/abstract=199428 orhttp://dx.doi.org/10.2139/ssrn.199428

5.

A Simple Derivation of the Capital Asset Pricing Model from

the Capital Market Line

Chris Deeley
Charles Sturt University
August 20, 2012
Abstract:
This paper demonstrates a simple way of deriving both
the Capital Asset Pricing Model (CAPM) and a capital assets beta value from
the Capital Market Line (CML). The CML model is extended to include a series of
isocorrelation curves along which the returns of any portfolio can be plotted according to
its total risk and the degree to which its return correlates to that of the market. This
approach is simpler than methods currently available in the relevant literature and may
be useful for teaching purposes.
Number of Pages in PDF File: 6
Keywords: capital market line, CML, capital asset pricing model, CAPM, security market line, SML,
isocorrelation curves, isobeta curves
JEL Classification: G11
Deeley, Chris, A Simple Derivation of the Capital Asset Pricing Model from the Capital Market Line (August 20,
2012). Available at SSRN: http://ssrn.com/abstract=2132332 or http://dx.doi.org/10.2139/ssrn.2132332

6.

A Mean-Variance Capital Asset Pricing Model for Long Short

Equity Hedge Fund Portfolios
David Hampton
HedgeFundSciences
March 14, 2009

Abstract:
In this paper a single factor mean-variance Capital Asset Pricing model is derived for long
short equity investment portfolios. This model is empirically tested using a statistical
arbitrage momentum trading strategy based on Dow Jones 30 historical equity data from
1986 to 2002. This trading strategy commonly utilized in practice by hedge funds is
typically classified as systematic statistical arbitrage within the long short equity style.
The equilibrium two moment model developed has a desirable feature in that it is
leverage invariant - a useful quality if used for long short hedge fund performance
measurement where leverage may be unknown, non-constant and which may vary
widely between various long short hedge fund portfolios making alpha estimation
difficult. Alpha is modeled as a function of beta using the concept of entropy as
interpreted by Shannon\cite{Shannon48}. The two moment equations derived constitute
equilibrium mean-variance model and as such long only, short only and fractional beta
long/short portfolios can be priced in the CAPM sense. The approach taken is to assume
that during the life of the investment, the overall portfolio can be represented by the

returns of the two sub-portfolios represented by long and short positions via separation
with a corresponding correlation coefficient.
It is shown that the expected portfolio return model agrees with the classical CAPM for
expected portfolio return\cite{Sharpe64} in the theory of market equilibrium under
conditions of risk. The same analytical technique used for the first
moment model derivation is then used to derive the CAPM variance model. The validity
of this variance model is tested at the 95 per cent confidence level by empirically
simulating a variable fractional beta long short statistical arbitrage momentum trading
strategy using Dow Jones 30 daily equity price data from 1988 to 2002. The meanvariance model is then developed further in leverage invariant equilibrium which leads to
the formulation of an analytical dynamic alpha equation. As this function can have a
maximum value as a function of beta, the usual calculus techniques are used to derive
the analytical objective function which allows the determination of the optimal meanvariance long short beta portfolio. Minimum existence conditions are then derived which
dictate the minimum pre-requisite performance expectations for the creation of a
long/Short equity portfolio for domination of the long only market index in the meanvariance sense. Finally, since both the mean and variance expectation equations are
derived, a stochastic differential equation is formulated and the Black-Scholes option
price derived.
Number of Pages in PDF File: 28
Keywords: Mean, Variance, Long Short Equity, Hedge Fund, Leverage Invariant, Statistical
Arbitrage, Capital Asset Pricing Model, Risk, Return, Sharpe Ratio, Equity Hedge, Momentum,
Optimal Beta Control, Equilibrium Empirical Asset Pricing, Existence Conditions, Black-Scholes
Option Price
JEL Classification: C00, G00, G12
Hampton, David, A Mean-Variance Capital Asset Pricing Model for Long Short Equity Hedge Fund Portfolios
(March 14, 2009). Available at SSRN: http://ssrn.com/abstract=1071566 orhttp://dx.doi.org/10.2139/ssrn.1071566

7.

Intertemporal CAPM and the Cross-Section of Stock Returns

Joseph Chen
University of California, Davis - Graduate School of Management
May 2002
EFA 2002 Berlin Meetings Discussion Paper

Abstract:
This paper examines whether the historically high returns associated with the size effect,
the book-to-market effect, and the momentum effect can be explained within
an asset pricingframework suggested by Merton's (1973)
Intertemporal Capital Asset Pricing Model. Controlling for the market, an asset may earn
a risk premium if it performs poorly when the prospects for the future turn sour. I develop
a model with time-varying expected market returns and time-varying market volatilities
to reflect thechanges in the investment opportunity set of the economy. Campbell's
(1993, 1996) technique of substituting out aggregate consumption delivers two key
insights.An underlying mechanism is that in the absence of frictions,the aggregate
budget constraint restricts variations in market returns to affect aggregate consumption
at some horizon. Hence the first insight is that if a factor reflects the changes in the

investment opportunity set, its risk premium should be linked to the amount of
information that it conveys about the future. The second insight is that the risk premia
across factors should be linked to each other through the willingness of investors tobear
risk. I test whether the returns associated with the size effect, the book-to-market effect,
and the momentum effect are consistent with these restrictions.This model is estimated
using a multivariate VAR-GARCH model with non-Gaussian innovations. The estimates
suggest that the historical returns on thebook-to-market effect and the momentum effect
are too high to be explained as compensation for exposures to adversechanges in the
investment opportunity set.
Number of Pages in PDF File: 56
Chen, Joseph, Intertemporal CAPM and the Cross-Section of Stock Returns (May 2002). EFA 2002 Berlin
Meetings Discussion Paper. Available at
SSRN: http://ssrn.com/abstract=301918 orhttp://dx.doi.org/10.2139/ssrn.301918

8.

Applying the Capital Asset Pricing Model

Robert S. Harris
University of Virginia - Darden School of Business
UVA-F-1456

Abstract:
This note discusses how some of the most financially sophisticated companies and
financial advisers estimate the cost of equity capital. It focuses on areas where finance
theory is silent or ambiguous and practitioners are left to their own devices. Survey
evidence shows that the Capital Asset Pricing Model (CAPM) is the most widely
used model. The note discusses methods companies use to estimate the three key
elements needed to apply the CAPM: a proxy for the risk-free rate, an estimate of beta,
and an equity-market risk premium. The note is useful for students attempting to apply
the Capital Asset Pricing Model.
Harris, Robert S., Applying the Capital Asset Pricing Model. Darden Case No. UVA-F-1456. Available at
SSRN:http://ssrn.com/abstract=909893

A Surprising Development: Tests of

the Capital Asset Pricing Model and the Efficient Market Hypothesis
in Turkey's Securities Markets
9.

James Kurt Dew

Tecnolgico de Monterrey
June 2001
Abstract:

This paper performs two tests of the efficient market hypothesis in the markets for
Turkish securities using GARCH-M methods. The first test is a joint test of the Efficient
Market Hypothesis and a Multifactor Capital Asset Pricing Model. We wondered if
a Capital Asset Pricing Model with inter-temporal variation of risks would shed any light
on the reason for surprisingly low estimates of beta in the
Classical Capital Asset Pricing Model for Turkey and other Emerging Markets. We also
wondered whether, because of the newness and high volatility of Turkey's financial
markets, we could find market inefficiencies. We find that we cannot reject the null
hypothesis that the CAPM applies and Turkish securities markets are efficient. The first
test analysis also provides an estimate of the cost of capital in Turkey and gives us an
estimated value of the beta of Turkey's common stock with the World stock portfolio of
about one. The second test develops a forecasting model for returns to a specific
portfolio, long the ISE Dollar Index and short the S&P 500 composite. We sought once
again evidence of market inefficiency by asking whether returns to this portfolio were
greater than or were commensurate with its systematic risks. We find that simply buying
and holding the portfolio produced a low ratio of return to risk, suggesting that the
portfolio is not on the efficient frontier of the Capital Market line. But we found that an
active trading rule generates very high returns. Normally this is evidence of weak form
inefficiency. But because portfolio risks also vary over time we still cannot reject the
efficient market hypothesis. A surprising development.
Dew, James Kurt, A Surprising Development: Tests of the Capital Asset Pricing Model and the Efficient Market
Hypothesis in Turkey's Securities Markets (June 2001). Available at
SSRN: http://ssrn.com/abstract=271890 orhttp://dx.doi.org/10.2139/ssrn.271890

10.

The CAPM and Beta in an Imperfect Market

Ramon P. DeGennaro
University of Tennessee, Knoxville - Department of Finance

Sangphill Kim
University of Massachusetts Lowell - Department of Finance

Abstract:
The General Capital Asset Pricing Model (GCAPM) incorporates certain market
imperfections (see Levy, 1978 and 1980). Levy concludes that in GCAPM equilibrium, all
investors do not necessarily hold the market portfolio and that a security's own variance
is priced. We show that financial intermediaries, responding to potential abnormal profits,
relax an important GCAPM constraint. The introduction of intermediaries into the GCAPM
leads to results not unlike those of the CAPM itself. If an asset's own variance affects its
price, we conclude that this feature provides a major reason for the existence of financial
intermediaries.
DeGennaro, Ramon P. and Kim, Sangphill, The CAPM and Beta in an Imperfect Market. Available at
SSRN:http://ssrn.com/abstract=372780 or http://dx.doi.org/10.2139/ssrn.372780

11.

General Capital Asset Pricing Model (GCAPM) - A

Microeconomic Theory of Investments

Stephen C. Fan
Fan Asset Management

Abstract:
The traditional CAPM can not explain empirically flat beta risk premiums and pronounced
equity style effects. This paper proposes a new capital asset pricing model - GCAPM,
which restores the "invisible hand of markets" as the sole mechanism for any
competitive capital market equilibriums. GCAPM firmly links capital asset pricing with
investors' time-variant and heterogeneous investment objectives, risk concerns,
and asset valuations. It bestows modern finance paradigms with broader definitions and
richer economic contents. It shows that, under the new light, CAPM paradigms are alive
and well, independent of its framework and assumptions. It also shows that modern
finance paradigms have been seriously mis-interpreted, mis-modeled, mis-tested, and
mis-applied in many occasions, including those causing recent CAPM controversies. In its
Mathematical Appendix, GCAPM provides first-hand, closed-form derivations of modern
finance paradigms, a new set of asset pricing theorems, and various forms
of capital asset pricing models from the perspective of competitive capitalmarket
equilibrium. It reveals the competitive equilibrium model behind Ross and Roll's APT
(1976) for the first time since 1976. It also proposes a new
Canonical Capital Asset PricingModel, which supports for Sharpe's (1988-95) return-based
style analyses and enhances CAPM's two asset-pricing portfolios into a set of marketdriven canonical asset-pricing portfolios. GCAPM resolves CAPM controversies, unifies
positive and normative thoughts of finance, establishes missing links between modern
finance paradigms and real-world financial practices, and provides a new framework for
financial studies.

Fan, Stephen C., General Capital Asset Pricing Model (GCAPM) - A Microeconomic Theory of Investments.
Available at SSRN: http://ssrn.com/abstract=286815 or http://dx.doi.org/10.2139/ssrn.286815

13.

A Review of Capital Asset Pricing Models

Don (Tissa) U. A. Galagedera

Monash University - Department of Econometrics and Business Statistics
March 2004
Abstract:
This paper provides a review of the main features of asset pricing models. The review
includes single-factor and multi-factor models, extended forms of
the Capital Asset Pricing Model(CAPM) with higher-order co-moments
and asset pricing models conditional on time varying volatility models.
Galagedera, Don (Tissa) U. A., A Review of Capital Asset Pricing Models (March 2004). Available at
SSRN:http://ssrn.com/abstract=599441 or http://dx.doi.org/10.2139/ssrn.599441

14.

Estimation of Expected Return: CAPM vs Fama and

French

Jan Bartholdy
University of Aarhus - Aarhus School of Business - Department of Business Studies

Paula Peare
University of Aarhus - Department of Finance
Novermber 11, 2002
Abstract:
Most practitioners favour a one factor model (CAPM) when estimating expected return for
an individual stock. For estimation of portfolio returns academics recommend the Fama
and French three factor model. The main objective of this paper is to compare the
performance of these two models for individual stocks. First, estimates for individual
stock returns based on CAPM are obtained using different time frames, data frequencies,
and indexes. It is found that five years of monthly data and an equal-weighted index, as
opposed to the commonly recommended value-weighted index, provide the best
estimate. However performance of the model is very poor; it explains on average three
percent of differences in returns. Then, estimates for individual stock returns are
obtained based on the Fama and French model using five years of monthly data.
This model, however, does not do much better; independent of the index used it explains
on average five percent of differences in returns. These results provide a possible
explanation for why CAPM is used so extensively by practitioners; the additional cost
associated with Fama and French is not justified. However, they also bring into question
the use of either model for estimation of individual stock returns.
Bartholdy, Jan and Peare, Paula, Estimation of Expected Return: CAPM vs Fama and French
(Novermber 11, 2002). Available at
SSRN: http://ssrn.com/abstract=350100 or http://dx.doi.org/10.2139/ssrn.350100

CAPM Failure & New CAPM Relationship

Jan F. Jacobs
Independent
October 14, 2004
Abstract:
The cost of equity is required (besides various other basic data) for many financial
applications such as capital budgeting decisions and performance measurements. A
common procedure is to use the Capital Asset Pricing Model (CAPM), which involves
estimation of an expected risk premium equal to beta times the expected risk premium
on the 'market' portfolio, the portfolio containing all assets in the world. Since the market

portfolio is not observable a proxy must be used. Typically beta is estimated using a
particular index and another (arbitrary) estimate is chosen for the expected market risk
premium. The estimates for beta and the expected market risk premium are then
multiplied together. It is obvious that this procedure more than likely yields a biased
estimate for the cost of equity. So far, the author agrees fully with what has been
extensively described by Jan Bartholdy and Paula Peare in their paper entitled 'Estimating
Cost of Equity', re http://ssrn.com/abstract=252270. Note: indeed estimating, the cost of
equity cannot be calculated perfectly in each and every detail. What has been argued by
Bartholdy and Peare cannot be allowed to pass without comment. They rightly criticise
CAPM and their observation is correct, it is indeed surprising that CAPM is so widely used
in the way it is. The very heart of the author's criticism relates to the discrete interest
rates that are in use both within CAPM and by the two step procedure suggested by
Bartholdy and Peare. The reasoning is simple: a discrete 'rate' is not a rate.
Consequently, most if not all calculations making (risk-)additions to discrete rates do not
fit. Outcomes from such artificial calculations are virtually worthless, notably if and when
precise answers are necessary. CAPM is proven not valid. Initially, a given risk free
discrete interest 'rate' must be translated into the corresponding continuous interest
rate, in order to preserve sensible follow-up calculations.
Beta-values that are provided by commercial beta-providers are the input into dubious
numerations and consequently the CAPM-outcome, the officially presented risk included
'rate'-figure, is artificial. The end outcomes are spurious. One has only to push the e-key
on any simple pocket-calculator to defeat the entire financial community that is clinging
to old traditions. Who is afraid of the e-power? Busy with all kinds of financial tools.
Neither effective (not doing right things) nor efficient (not doing things right). Using PPR
(Period Percentage Rate, any period, any rate) i.e. Discrete Compound Interest to rank
investments is often deceptive. Financial tools - like the old CAPM - using PPR are
dangerous since they lead to misallocation of funds and biased performance measures. It
all can be done both finally and easily, as is demonstrated in this paper.
The paper is organized as follows. Section 1 discusses basic notions, followed by a close
inspection of the central CAPM-problem in section 2. The solution i.e. the new CAPM
relationship representing 'the state of the art' is the main subject of section 3. An
exemplary problem in illustration is given in section 4. Finally, section 5 concludes.
Jacobs, Jan F., CAPM Failure & New CAPM Relationship (October 14, 2004). Available at
SSRN:http://ssrn.com/abstract=604643 or http://dx.doi.org/10.2139/ssrn.604643

The Capital Asset Pricing Models Risk-Free Rate

Sandip Mukherji
Howard University - School of Business
2011
The International Journal of Business and Finance Research, Vol. 5, No. 2, pp. 75-83, 2011
Abstract:
The risk-free rate is an important input in one of the most widely used finance models:
the Capital Asset Pricing Model. Academics and practitioners tend to use either shortterm Treasury bills or long-term Treasury bonds as the risk-free security without empirical
justification. This study investigates the market and inflation risks of Treasury securities
with different maturities over different investment horizons. The results show that mean
real returns, volatility, and market and inflation risks, of Treasury securities increase with

the maturity period. Only Treasury bills do not have any market risk for 1- and 5-year
periods, and they have the lowest market risk over 10 years. Although Treasury securities
of all maturities have significant inflation risk, Treasury bills have the lowest inflation risk
over all three horizons. Further, the inflation beta and explanatory power of inflation for
real Treasury bill returns decline with the investment horizon. Over 10 years, inflation and
market risks explain only 13% of variations in real Treasury bill returns, compared to 20%
of intermediate government bond returns, and 23% of long government bond returns.
These findings indicate that Treasury bills are better proxies for the risk-free rate than
longer-term Treasury securities
Mukherji, Sandip, The Capital Asset Pricing Models Risk-Free Rate (2011). The International Journal of
Business and Finance Research, Vol. 5, No. 2, pp. 75-83, 2011. Available at
SSRN:http://ssrn.com/abstract=1876117

Capital Asset Pricing Model

Kazem Falahati
affiliation not provided to SSRN

Abstract:
There is a great deal of debate in finance literature as to
whether Capital Asset Pricing Model is empirically valid, and in particular whether beta
can be properly measured. This paper proves that from a theoretical perspective CAPM
leads to mathematical contradictions. In other words, CAPM is theoretically invalid, and
beta is dead!
Number of Pages in PDF File: 3
Falahati, Kazem, Capital Asset Pricing Model. Available at
SSRN: http://ssrn.com/abstract=499441 orhttp://dx.doi.org/10.2139/ssrn.499441

Capital Asset Pricing Under Ambiguity

Yehuda (Yud) Izhakian

New York University (NYU) - Leonard N. Stern School of Business
February 2012
NYU Working Paper No. 2451/31464
Abstract:
This paper generalizes the meanvariance preferences to meanvarianceambiguity
preferences by relaxing the standard assumption that probabilities are known and
assuming that probabilities are themselves random. It introduces a new measure of
uncertainty, one that consolidates risk and ambiguity, which is employed for extending
the CAPM from risk to uncertainty by incorporating ambiguity. This model makes the
distinction between systematic ambiguity and idiosyncratic ambiguity and proves that

the ambiguity premium is proportional to the systematic ambiguity. The merit of

this model is twofold: first, it can be tested empirically; second, it can serve for
measuring the performance of portfolios relative to their uncertainty.
Izhakian, Yehuda (Yud), Capital Asset Pricing Under Ambiguity (February 2012). NYU Working Paper
No. 2451/31464. Available at SSRN: http://ssrn.com/abstract=2007815

The Evolution of Portfolio Rules and

the Capital Asset Pricing Model

Emanuela Sciubba
University of London - Birkbeck College

Abstract:
The aim of this paper is to test the performance of the standard version of CAPM in an
evolutionary framework. We imagine a heterogeneous population of long-lived agents
who invest their wealth according to different portfolio rules and we ask what is the fate
of those who happen to behave as prescribed by CAPM. In a complete securities' market
with aggregate uncertainty, we prove that traders who either "believe" in CAPM and use
it as a rule of thumb, or are endowed with genuine mean-variance preferences, under
some very weak conditions, vanish in the long run. We show that a sufficient condition to
drive CAPM or mean variance traders' wealth shares to zero is that an investor endowed
with a logarithmic utility function enters the market. We finally check the robustness of
our results allowing for different kinds of heterogeneity among traders.
Sciubba, Emanuela, The Evolution of Portfolio Rules and the Capital Asset Pricing Model. Available at
SSRN:http://ssrn.com/abstract=302404 or http://dx.doi.org/10.2139/ssrn.302404

Validity of Capital Asset Pricing Model & Stability of

Systematic Risk (Beta): An Empirical Study on Indian Stock
Market

Krish
affiliation not provided to SSRN
November 13, 2010
Abstract:
The capital asset pricing model (CAPM) is the standard risk-return model used by most
academicians and practitioners. The underlying concept of CAPM is that investors are
rewarded for only that portion of risk which is not diversifiable. This non-diversifiable risk
is termed as beta, to which expected returns are linked. The objective of the study is to
test the validity of this theory in Indian capital market & the stability of this non
diversifiable risk (i.e. systematic risk or beta). The study has used the data of 10 stocks &
10 sectoral indices listed on the BSE, for a period of 4 years (January 2005 to December

2008) for the analysis. The studies provide evidence against the CAPM hypothesis. And
finally, the studies also provide the evidence against the stability of systematic risk.
Krish, Validity of Capital Asset Pricing Model & Stability of Systematic Risk (Beta): An Empirical Study on
Indian Stock Market (November 13, 2010). Available at
SSRN: http://ssrn.com/abstract=1708463 orhttp://dx.doi.org/10.2139/ssrn.1708463

Asset Pricing Models in Indian Capital Markets

Mihir Dash
Alliance University - School of Business

Rishika Rao
affiliation not provided to SSRN
July 14, 2009
Abstract:
Asset pricing theory is a framework designed to identify and measure risk, as well as to
assign rewards for bearing risk. There is a general contention that the
simple Capital Asset PricingModel (CAPM) does not adequately describe stock return
behavior; other macro-economic factors may also play an important role. In particular,
emerging capital markets like India provide a challenge to asset pricing theory; markets
that have undertaken substantial liberalization of their financial sectors to allow for the
free flow of foreign portfolio investments tend to be more sensitive to the macroeconomic factors. The present study was based on a sample of fifty stocks listed in the
S&P 500 index of the National Stock Exchange, belonging to eight of the most flourishing
industries in the Indian economy. The objectives of the study were to compare and assess
the CAPM and the Arbitrage Pricing Model (APM), as applied to Indiancapital markets, and
to find out how macroeconomic variables affect the returns of different securities.
Dash, Mihir and Rao, Rishika, Asset Pricing Models in Indian Capital Markets (July 14, 2009). Available
at SSRN:http://ssrn.com/abstract=1666925 or http://dx.doi.org/10.2139/ssrn.1666925