Tests of Capital Market Theory and Implications of the Evidence

Is Financial Analysis Useless? Proceedings of a Seminar on the Efficient Market and Random Walk Hypotheses (The Financial Analysts Research Foundation, 1975).

19 Pages Posted: 24 Mar 2003

See all articles by Michael C. Jensen

Michael C. Jensen

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Abstract

This paper will review the empirical evidence on the market model and discuss its implications for security analysis. To begin this discussion, let me point out that the Market Model, or what Sharpe (1963) originally called the diagonal model, and the Capital Asset Pricing Model are very distinct models. Neither one depends in any way on the other. Many people confuse these two models but they refer to quite different concepts and it is well to keep the distinction clearly in mind. This paper will consider the major characteristics of the Market Model, provide some illustrative examples and briefly summarize the evidence. A Technical Paper prepared in connection with this paper considers the major characteristics of the Asset Pricing Model and a discussion of the theoretical and empirical content of the Two Factor Model.

Keywords: market model, capital market theory, capital asset pricing model, market returns, two factor model, market returns, diversification, market forecasts, risk

Suggested Citation

Jensen, Michael C., Tests of Capital Market Theory and Implications of the Evidence. Is Financial Analysis Useless? Proceedings of a Seminar on the Efficient Market and Random Walk Hypotheses (The Financial Analysts Research Foundation, 1975).. Available at SSRN: https://ssrn.com/abstract=350427 or http://dx.doi.org/10.2139/ssrn.350427

Michael C. Jensen (Contact Author)

Harvard Business School ( email )

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Negotiations, Organizations & Markets
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Harvard University - Accounting & Control Unit ( email )

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