Have we Misinterpreted CAPM for 40 years? A Theoretical Proof
Stephen C. Fan
Fan Asset Management
September 15, 2004
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.
Number of Pages in PDF File: 19
Keywords: GCAPM, CAPM, Beta, Modern Finance Theory, Market Efficiency
JEL Classification: G00, G10, G12, G14
Date posted: September 15, 2004
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