Is It Ethical to Teach That Beta and CAPM Explain Something?
37 Pages Posted: 19 Jun 2017 Last revised: 2 Jun 2019
Date Written: May 28, 2019
My answer to the question in the title is NO. It is crystal clear that CAPM and its Betas do not explain anything about expected or required returns. There are mountains of evidence to support my stance.
If, for any reason, a person teaches that Beta and CAPM explain something and he knows that they do not explain anything, such a person is lying. To lie is not ethical. If the person “believes” that Beta and CAPM explain something, his “belief” is due to ignorance (he has not studied enough, he has not done enough calculations, he just repeats what he heard to others…) For a professor, it is not ethical to teach about a subject that he does not know enough about.
It is very important to differentiate between a fact (something that truly exists or happens) and an opinion (what someone thinks about a particular thing). It is a fact that Beta and CAPM do not explain anything about expected or required returns.
I welcome comments (disagreements, errors…) that will help the readers to think about using and teaching CAPM and calculated betas. The paper also incorporates 107 comments from readers of previous versions.
Keywords: Ethics, Beta, Models, CAPM, Sharpe, Fama, Required Return, Expected Return, Risk, Recipes
JEL Classification: G12, G31, M21
Suggested Citation: Suggested Citation