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Stop Treating CAPM as Reality?

Posted in Equity Premium, Volatility Effects

Is the Capital Asset Pricing Model (CAPM), which relates the return of an asset to its non-diversifiable risk, called beta, worth learning? In his June 2017 paper (provocatively) entitled “Is It Ethical to Teach That Beta and CAPM Explain Something?”, Pablo Fernandez tackles this question. Based on the body of relevant research, he concludes that:

In summary, the body of evidence suggests that CAPM beta has such little utility for predicting asset behavior that investors should not use it.

The author tells his students “that although many people use CAPM, it does not explain anything and that it is absurd.”

See also the closely related “Lessons Learned from Attacking CAPM”.

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