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Sensitivity of Multivariate Tests of the Capital Asset‐Pricing Model to the Return Measurement Interval
Author(s) -
HANDA PUNEET,
KOTHARI S. P.,
WASLEY CHARLES
Publication year - 1993
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1993.tb04767.x
Subject(s) - capital asset pricing model , econometrics , multivariate statistics , economics , expected return , systematic risk , rate of return , financial economics , sharpe ratio , internal rate of return , capital asset , risk–return spectrum , mathematics , statistics , portfolio , finance , microeconomics , production (economics)
The capital asset‐pricing model's (CAPM) primary empirical implication is a positively sloped linear relation between a security's expected rate of return and its relative risk (beta). Recent research indicates that inferences about the risk‐return relation are sensitive to the choice of the return measurement interval. We perform multivariate tests of the Sharpe‐Lintner CAPM using monthly and annual returns on market‐value‐ranked portfolios. The CAPM is rejected using monthly returns, a result consistent with previous research. In contrast, we fail to reject the CAPM when annual holding period returns are used.