Resurrecting the Capital Asset Pricing Model
34 Pages Posted: 17 Oct 2016
Date Written: October 15, 2015
The capital asset pricing model is generally considered incapable of explaining the stock market behavior. I show that this conclusion is premature, and incorporating a pragmatic approach to approximating optimal Bayesian inference in the model resurrects CAPM. The adjusted CAPM internalizes the well-known size, value, and momentum effects, high-alpha-of-low-beta-stocks, accruals, low volatility anomaly, stock-split anomaly, and reverse stock-split anomaly. The market equity premium is also larger with anchoring. Immediate applications of the adjusted CAPM include improved cost of equity calculation, and improved evaluation of managed portfolio performance.
Keywords: Size Effect, Value Effect, Momentum Effect, Low Volatility Anomaly, Informative Starting Points, Anchoring-and-Adjustment Heuristic
JEL Classification: G12, G11, G10, G02
Suggested Citation: Suggested Citation