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Unformatted text preview: Chapter 10 Return and Risk 10A-1 . h h e . c o / r j Is Beta Dead? The capital asset pricing model represents one of the most important advances in fi nancial economics. It is clearly useful for investment purposes because it shows how the expected return on an asset is related to its beta. In addition, we will show in Chapter 12 that it is use- ful in corporate fi nance because the discount rate on a project is a function of the projects beta. However, never forget that, as with any other model, the CAPM is not revealed truth but, rather, a construct to be empirically tested. The fi rst empirical tests of the CAPM occurred over 20 years ago and were quite sup- portive. Using data from the 1930s to the 1960s, researchers showed that the average return on a portfolio of stocks was positively related to the beta of the portfolio, 1 a fi nding consis- tent with the CAPM. Though some evidence in these studies was less consistent with the CAPM, 2 fi nancial economists were quick to embrace the CAPM following these empirical papers. Although a large body of empirical work developed in the following decades, often with varying results, the CAPM was not seriously called into question until the 1990s. Two with varying results, the CAPM was not seriously called into question until the 1990s....
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This note was uploaded on 01/17/2011 for the course ACTSC 372 taught by Professor Maryhardy during the Spring '09 term at Waterloo.
- Spring '09