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The CAPM is Alive and Well: A Review and Synthesis
Author(s) -
Levy Haim
Publication year - 2010
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2009.00530.x
Subject(s) - capital asset pricing model , expected utility hypothesis , economics , variance (accounting) , econometrics , financial economics , accounting
Mean‐Variance (M‐V) analysis and the CAPM are derived in the expected utility framework. Behavioural Economists and Psychologists (BE&P) advocate that expected utility is invalid, suggesting Prospect Theory as a substitute paradigm. Moreover, they show that the M‐V rule, which is the foundation of the CAPM, is not always consistent with peoples’ choices. Thus, BE&P cast doubt on the validity of expected utility paradigm and of the M‐V rule, hence the CAPM is theoretically questionable. In addition, there is very little empirical support to the CAPM. We show in this study that the CAPM is theoretically valid even when one accepts the BE&P framework and even when expected utility is invalid. Moreover, within the BE&P framework there is a strong experimental support for the CAPM.