The Capm Theory and Practice

Eugene F. Fama University of Chicago - Booth school of Business Kenneth R. French Dartmouth College - Tuck initiate of Business; National Bureau of Economic Research (NBER) rarefied 2003 CRSP Working Paper No. 550; Tuck Business School Working Paper No. 03-26 Abstract: The capital summation pricing mock up (CAPM) of William Sharpe (1964) and John Lintner (1965) marks the birth of addition pricing theory (resulting in a Nobel Prize for Sharpe in 1990). Before their breakthrough, there were no asset pricing models build from first principles about(predicate) the nature of tastes and investment opportunities and with clear testable predictions about jeopardize 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 surgery 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 unanalyzable logic and intuitively pleasing predictions about how to measure risk and about the relation between anticipate return and risk. Unfortunately, perchance because of its simplicity, the verifiable record of the model is poor - poor lavish to invalidate the way it is used in applications.

The models data-based problems may reflect true failings. (It is, after all, just a model.) But they may as well as be due to shortcomings of the empirical tests, most notably, poor proxies for the market portfolio of invested wealth, which plays a central reference in the models 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 CAPMs predictions about risk and expected return, we begin with a brief summary of its logic. We then redirect examination the history of empirical work on the model and what it says about shortcomings of the CAPM... If you want to get a full essay, order it on our website: Orderessay

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