Empirical Tests of the CAPM

Empirical Tests of the CAPM - 8-1Empirical Tests of the...

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Unformatted text preview: 8-1Empirical 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 8-2Empirical 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 –8-3Market Portfolio: Theory vs. Practice•The true market portfolio should–Included all the risky assets in the world–In equilibrium, the assets would be included in the portfolio in proportion to their market value....
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This note was uploaded on 01/24/2012 for the course FIN 4360 taught by Professor Davidbray during the Spring '12 term at Kennesaw.

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Empirical Tests of the CAPM - 8-1Empirical Tests of the...

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