Does the CAPM Predict Returns?

49 Pages Posted: 22 Apr 2019 Last revised: 20 May 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: April 28, 2020

Abstract

We provide empirical evidence that asset returns can be predicted using the CAPM. When predicting next month's returns, the CAPM yields an out-of-sample R2 of about 4% across portfolios and of about 2.7% across S\&P 500 stocks. That is, the predictive power of the market return predictor transmits to the product of the asset beta and the expected market return. As a consequence, trading strategies exploiting the predictive power of the CAPM have Sharpe ratios up to 125% larger than those of the corresponding buy-and-hold strategies. Furthermore, the average return of these trading strategies increases with their systematic risk (beta).

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? (April 28, 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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