Returns on human capital from salaries or probability

Info icon This preview shows pages 11–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Returns on human capital (from salaries or probability of layoffs) are not included in the market portfolio. I CAPM unable to explain several anomalies: I Size anomaly : controlling for beta, stocks of smaller firms have higher historical returns than stocks of larger firms I Value anomaly : controlling for beta, “value” stocks have higher historical returns than “growth” stocks I Momentum anomaly : controlling for beta, stocks that had higher recent performance (prior 3-month, 6-month, or 12-month returns) have higher historical returns than stocks with weak recent performance. I CAPM does not consider transaction costs/illiquidity: Less liquid stocks with higher transaction costs need to have higher required rates of return to compensate investors.
Image of page 11

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Augmenting the CAPM I Fama-French (1992,1993): They find that small firm stocks outperform large firm stock, high book-to-market (value) stocks outperform low book-to-market (growth) stocks. I Posit that “Size” and “Value” characteristics of a firm represent non-diversifiable risks that are not picked up by the market risk premium. I Multifactor (three-factor) model: E [ r i ] = r f +( E [ r M ] - r f ) × β i , M + SMB × β i , SMB + HML × β i , HML I In this course, we will use CAPM for project evaluation, but important to know that there are ways to augment it to get better estimate of expected returns!!!
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern