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Have we Misinterpreted CAPM for 40 years? A Theoretical Proof

19 Pages Posted: 15 Sep 2004  

Stephen C. Fan

Fan Asset Management

Date Written: September 15, 2004


The validity of CAPM has been contingent on its security market line hypothesis, which asserts that higher-beta-risk assets should carry higher expected returns. Owing to a lack of empirical support for that hypothesis, many have declared CAPM dead. However, by surrogating assets' following-period ex-post returns as asset expected returns, most empirical studies have misinterpreted CAPM. This paper shows that higher-beta-risk assets will not necessarily generate higher or lower ex-post returns and that CAPM is such a common sense theory that one can literally observe its ex-post return paradigms at work in the daily capital marketplace.

Keywords: GCAPM, CAPM, Beta, Modern Finance Theory, Market Efficiency

JEL Classification: G00, G10, G12, G14

Suggested Citation

Fan, Stephen C., Have we Misinterpreted CAPM for 40 years? A Theoretical Proof (September 15, 2004). Available at SSRN: or

Stephen Fan (Contact Author)

Fan Asset Management ( email )

4300 Stevens Creek Blvd, Suite 201
San Jose, CA 95129
United States
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