Discuss the evidence of the tests carried out to see if the CAP-M does describe the real world.

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Issue:

Business

 

Written by:

Alex B

 

Date added:

October 31, 2016

 

Level:

University

 

Grade:

A

 

No of pages / words:

2 / 519

 

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2120 times

 

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The results showed that they contradicted with the capital asset pricing model, but both of their studies did have statistical weaknesses which might explain the results. The error was that they estimated individual stock betas whilst the fact is that estimated betas and risk are correlated. Another test that was carried out was in 1973 by Fama and Macbeth...
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Their test involved ?combining the time series and cross sectional steps to investigate whether the risk premium of the factors in the second pass regression is non-zero.' They grouped shares in twenty portfolios and estimated past betas using the methodology explained above. They then carried out a cross sectional regression for each month from 1935-1968...
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