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THE ACCURACY OF CAPM PROXIES FOR ESTIMATING A FIRM'S COST OF EQUITY
Author(s) -
Lally Martin
Publication year - 1995
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1995.tb00276.x
Subject(s) - capital asset pricing model , cost of equity , proxy (statistics) , economics , portfolio , equity (law) , econometrics , market portfolio , index (typography) , financial economics , cost of capital , statistics , microeconomics , mathematics , profit (economics) , computer science , world wide web , political science , law
In estimating a firm's cost of equity with the CAPM the standard procedure is to proxy the market portfolio by a share index. Since this index is not the market portfolio this may give rise to a bias in estimating the firm's cost of equity. This paper investigates this bias and concludes that it will arise if the factor coefficients are not proportional to those of the index. Even moderate departures from this proportionality condition may produce significant bias.