Lecture2014 - Lecture 14 Empirical Survey and Application:...

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Lecture 14 Empirical Survey and Application: CAPM I. CAPM: testable implications A) Only non-diversifiable risk matters. --- should not be able to “beat” the market using other information. B) Return is a linear function of covariance with the non-diversifiable market index II. Empirical Tests: A) Overall the CAPM does a good job of predicting expected return. --- “beta” explains most of the variation in stock returns --- “idiosyncratic risk is not “priced” ---however: there is a large body of research documenting “anomalies” Seasonal, holiday, and day of week effects Small firm, price/earnings, dividend yield effects Contrarian investment strategies Those interested in the evidence see: CAPM Cross sectional tests: Black, F., Jensen, M. and M. Scholes, 1972, "The Capital Asset Pricing Model: Some Empirical Tests," in M. Jensen ed., Studies in the Theory of Capital Markets . New York: Praeger. Fama, E. and K. French, 1992, "The Cross-Section of Expected Stock Returns,"
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This note was uploaded on 04/12/2008 for the course ECON 435 taught by Professor Chabot during the Winter '08 term at University of Michigan.

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Lecture2014 - Lecture 14 Empirical Survey and Application:...

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