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Empirical Tests of the CAPM

Empirical Tests of the CAPM - Empirical Tests of the CAPM...

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8-1 Empirical Tests of the CAPM Stability of Beta Betas for individual stocks are not stable Portfolio betas are reasonably stable The larger the portfolio of stocks and longer the period, the more stable the beta of the portfolio Comparability of Published Estimates of Beta Differences exist Hence, consider the return interval used and the firm’s relative size
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8-2 Empirical Tests of the CAPM Relationship between Systematic Risk and Return Effect of Skewness on Relationship Investors prefer stocks with high positive skewness that provide an opportunity for very large returns Effect of Size, P/E, and Leverage Size, and P/E have an inverse impact on returns after considering the CAPM. Financial Leverage also helps explain cross-section of returns Effect of Book-to-Market Value
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8-3 Market Portfolio: Theory vs. Practice The true market portfolio should Included all the risky assets in the world
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