Does the CAPM Predict Returns?

54 Pages Posted: 22 Apr 2019 Last revised: 4 Feb 2021

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: February 3, 2021

Abstract

We evaluate the cross-sectional performance of the CAPM in different expected market regimes. We show that CAPM-betas positively predict portfolio and individual stock returns when market returns are expected to be high, which occurs about 50% of the time. Consequently, the product of beta and the expected market return (CAPM) predicts asset returns out-of-sample, and the out-of-sample predictive power of the CAPM outperforms that of alternative factor models. Strategies exploiting the joint predictive power of beta and the market return predictor have average returns increasing with beta, and Sharpe ratios up to 100% larger than those of the corresponding buy-and-hold strategies.

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? (February 3, 2021). 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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