Have we Misinterpreted CAPM for 40 years? A Theoretical Proof

19 Pages Posted: 15 Sep 2004

Date Written: September 15, 2004

Abstract

The validity of CAPM has been contingent on its security market line hypothesis, which asserts that higher-beta-risk assets should carry higher expected returns. Owing to a lack of empirical support for that hypothesis, many have declared CAPM dead. However, by surrogating assets' following-period ex-post returns as asset expected returns, most empirical studies have misinterpreted CAPM. This paper shows that higher-beta-risk assets will not necessarily generate higher or lower ex-post returns and that CAPM is such a common sense theory that one can literally observe its ex-post return paradigms at work in the daily capital marketplace.

Keywords: GCAPM, CAPM, Beta, Modern Finance Theory, Market Efficiency

JEL Classification: G00, G10, G12, G14

Suggested Citation

Fan, Stephen C., Have we Misinterpreted CAPM for 40 years? A Theoretical Proof (September 15, 2004). Available at SSRN: https://ssrn.com/abstract=592167 or http://dx.doi.org/10.2139/ssrn.592167

Stephen C. Fan (Contact Author)

Fan Asset Management ( email )

712 Los Ninos Way
Los Altos, CA 94022
United States
6509412653 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2,231
Abstract Views
8,663
Rank
12,551
PlumX Metrics