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The best-beta CAPM

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  • Liang Zou
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    Abstract

    The issue of 'best-beta’ arises as soon as potential errors in the Sharpe-Lintner-Black capital asset pricing model (CAPM) are acknowledged. By incorporating a target variable into the investor preferences, this study derives a best-beta CAPM (BCAPM) that maintains the CAPM's theoretical appeal and analytical simplicity yet unambiguously improves its pricing accuracy. Empirical observations suggest that the BCAPM predicts expected returns better than the CAPM by 20% to 30% annually. Where we cannot invent, we may at least improve; we may give somewhat of novelty to that which was old, condensation to that which was diffuse, perspicuity to that which was obscure, and currency to that which was recondite .Charles Caleb Colton

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    Bibliographic Info

    Article provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.

    Volume (Year): 2 (2006)
    Issue (Month): 2 (March)
    Pages: 131-137

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    Handle: RePEc:taf:apfelt:v:2:y:2006:i:2:p:131-137

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    1. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    2. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Harvard Institute of Economic Research Working Papers 1897, Harvard - Institute of Economic Research.
    3. Dimson, Elroy & Mussavian, Massoud, 1999. "Three centuries of asset pricing," Journal of Banking & Finance, Elsevier, vol. 23(12), pages 1745-1769, December.
    4. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers 14, Cowles Foundation for Research in Economics, Yale University.
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