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The CAPM : Theoretical Validity, Empirical Intractability and Practical Applications
Author(s) -
Brown Philip,
Walter Terry
Publication year - 2013
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/j.1467-6281.2012.00383.x
Subject(s) - officer , corporate finance , citation , capital asset pricing model , library science , management , sociology , accounting , economics , political science , law , finance , computer science
Dempsey (2011) argues that the empirical evidence against the CAPM is so compelling that the CAPM should be abandoned, perhaps in favour of the assumption of the same expected return on all assets. There are two problems with this argument. First, it presumes the evidence is valid. Thirtyfive years ago Richard Roll (1977) concluded that the so-called “tests” of the CAPM were invalid because they used inefficient benchmark portfolios, whereas a valid test of the CAPM requires that the benchmark be efficient. Second, the suggestion that investors do not differentiate investment opportunities according to their unavoidable risk runs counter to the beliefs of theorists and practitioners and cannot be taken seriously. Finance practitioners and researchers continue, justifiably, to believe ex ante risk matters and that a risk premium exists, even if ex post their belief defies empirical confirmation. Dempsey’s message is not new: beta, which is at the heart of the CAPM, has been declared dead more than once, yet the CAPM, in one or other of its various guises, lives on.