Does the CAPM Predict Returns?

48 Pages Posted: 22 Apr 2019 Last revised: 27 Aug 2020

See all articles by Michael Hasler

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management

Date Written: August 26, 2020

Abstract

We provide empirical evidence that CAPM-betas positively predict asset returns when market returns are predicted to be high, which occurs about every other month. Consequently, the product of beta and the predicted market return (CAPM) predicts asset returns by combining the out-of-sample forecasting power of both beta and the market return predictor. Monthly out-of-sample R2s are substantial for both portfolios and individual stocks and translate into large trading gains. Indeed, trading strategies exploiting the forecasting power of the CAPM have Sharpe ratios up to 100% larger than the corresponding buy-and-hold strategies, and their average returns increase with their CAPM-betas.

Keywords: capital asset pricing model, predictability, cross-section of stock returns

JEL Classification: D53, G11, G12

Suggested Citation

Hasler, Michael and Martineau, Charles, Does the CAPM Predict Returns? (August 26, 2020). Available at SSRN: https://ssrn.com/abstract=3368264 or http://dx.doi.org/10.2139/ssrn.3368264

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

Charles Martineau (Contact Author)

University of Toronto - Rotman School of Management and UTSC Management ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

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