wwwmhhecomrwj Is Beta DeadThe capital asset pricing model represents one of the most important advances in nancial economics It is clearly useful for investment purposes because it shows how the exp ID: 864524
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1 Return and Risk www.mhhe.com/rwj Is Bet
Return and Risk www.mhhe.com/rwj Is Beta Dead? The capital asset pricing model represents one of the most important advances in Þ 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 Þ nance because the discount rate on a project is a function of the projectÕs 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 Þ rst empirical tests of the CAPM occurred over 20 years ago and were quite sup- Appendix 10A Perhaps the two most well-known papers were Fischer Black, Michael C. Jensen, and Myron S. Scholes, ÒThe Capital Asset Pricing Model: Some Empirical Tests,Ó in M. Jensen, ed., Studies in the Theory of Capital Markets(New York:
2 Praeger, 1972), and Eugene F. Fama and J
Praeger, 1972), and Eugene F. Fama and James MacBeth, ÒRisk, Return and Equilibrium: Some Empirical Tests,Ó os05902_ch10_appendix.indd 1 0/31/06 11:34:15 AM Part III RiskFourth, average returns are positively related to beta over the period from 1927 to the present. There appears to be no compelling reason for emphasizing a shorter period than this one. Fifth, average returns are actually positively related to beta over shorter periods when annual data, rather than monthly data, are used to estimate beta. There appears to be no compelling reason for preferring either monthly data over annual data or vice versa. Thus we believe that although the results of Fama and French are quite intriguing, they can-not be viewed as the Þ nal word. Points 4 and 5 are addressed in the Kothari, Shanken, and Sloan paper. www.mhhe.com/rwj os05902_ch10_appendix.indd 2 0/31/06 11:34:17 A