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The Capital Asset Pricing Model: Some Empirical Tests


Michael C. Jensen


Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Fischer Black


Sloan School of Management, MIT

Myron S. Scholes


Stanford Graduate School of Business; Platinum Grove Asset Management L.P.; Oak Hill Platinum Partners, LLC


Michael C. Jensen, STUDIES IN THE THEORY OF CAPITAL MARKETS, Praeger Publishers Inc., 1972

Abstract:     
Considerable attention has recently been given to general equilibrium models of the pricing of capital assets. Of these, perhaps the best known is the mean-variance formulation originally developed by Sharpe (1964) and Treynor (1961), and extended and clarified by Lintner (1965a; 1965b), Mossin (1966), Fama (1968a; 1968b), and Long (1972). In addition Treynor (1965), Sharpe (1966), and Jensen (1968; 1969) have developed portfolio evaluation models which are either based on this asset pricing model or bear a close relation to it. In the development of the asset pricing model it is assumed that (1) all investors are single period risk-averse utility of terminal wealth maximizers and can choose among portfolios solely on the basis of mean and variance, (2) there are no taxes or transactions costs, (3) all investors have homogeneous views regarding the parameters of the joint probability distribution of all security returns, and (4) all investors can borrow and lend at a given riskless rate of interest. The main result of the model is a statement of the relation between the expected risk premiums on individual assets and their "systematic risk." Our main purpose is to present some additional tests of this asset pricing model which avoid some of the problems of earlier studies and which, we believe, provide additional insights into the nature of the structure of security returns.

The evidence presented in Section II indicates the expected excess return on an asset is not strictly proportional to its B, and we believe that this evidence, coupled with that given in Section IV, is sufficiently strong to warrant rejection of the traditional form of the model given by (1). We then show in Section III how the cross-sectional tests are subject to measurement error bias, provide a solution to this problem through grouping procedures, and show how cross-sectional methods are relevant to testing the expanded two-factor form of the model. We show in Section IV that the mean of the beta factor has had a positive trend over the period 1931-65 and was on the order of 1.0 to 1.3% per month in the two sample intervals we examined in the period 1948-65. This seems to have been significantly different from the average risk-free rate and indeed is roughly the same size as the average market return of 1.3 and 1.2% per month over the two sample intervals in this period. This evidence seems to be sufficiently strong enough to warrant rejection of the traditional form of the model given by (1). In addition, the standard deviation of the beta factor over these two sample intervals was 2.0 and 2.2% per month, as compared with the standard deviation of the market factor of 3.6 and 3.8% per month. Thus the beta factor seems to be an important determinant of security returns.

Number of Pages in PDF File: 54

Keywords: capital asset pricing, measurements, Cross-sectional Tests, Two-Factor Model, aggregation problem

JEL Classification: G10, G12, G14

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Date posted: June 13, 2006  

Suggested Citation

Jensen, Michael C. and Black, Fischer and Scholes, Myron S., The Capital Asset Pricing Model: Some Empirical Tests. Michael C. Jensen, STUDIES IN THE THEORY OF CAPITAL MARKETS, Praeger Publishers Inc., 1972. Available at SSRN: http://ssrn.com/abstract=908569

Contact Information

Michael C. Jensen (Contact Author)
Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484
Social Science Electronic Publishing (SSEP), Inc. ( email )
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Sarasota, FL 34242
United States
617-510-3363 (Phone)
305 675-3166 (Fax)
HOME PAGE: http://ssrn.com/author=9

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Fischer Black (deceased)
Sloan School of Management, MIT
Author - Deceased
N/A
Myron S. Scholes
Stanford Graduate School of Business ( email )
Knight Way
Stanford, CA 94305-5015
United States
+1 415-812-7569 (Phone)
(650) 324-1519 (Fax)

Platinum Grove Asset Management L.P. ( email )
Reckson Executive Park, Building 4
1100 King Street
Rye Brook, NY 10573
United States
Oak Hill Platinum Partners, LLC ( email )
1100 King Street, Building 4
Rye Brook, NY 10573
United States
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