The Capital Asset Pricing Model in Economic Perspective
AbstractThe CAPM is incomplete, even as a basic model, with its demand-side focus, risk-averse investors, and internally inconsistent homogeneous beliefs. Empirical evidence provides little support for it. Yet it emboldens a notion that investors can earn higher returns by bearing un-diversifiable risk. Why? Perhaps incentives: Skilled investors don’t discourage a reliance on it (as unskilled investor trades create favorable price movements and capital gain opportunities), business schools continue to champion it (to preserve their credibility in producing marketable job candidates), and practitioners profit from applying it. A fresh view through an economic lens, un-entrenched in the financial status quo, could inspire advancement in asset pricing research that might, in turn, cultivate equality of wealth. We† present a straightforward, general theoretical benchmark for pricing risky investments in competitive asset markets and discover the equilibrium (systematic) risk–rate of return relationship depends on whose trading activity dominates, risk-averse or risk-taking investors.
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Bibliographic InfoPaper provided by University of Connecticut, Department of Economics in its series Alumni working papers with number 2013-01.
Length: 55 pages
Date of creation: Jan 2013
Date of revision: Dec 2013
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economics; finance; financial economics; capital asset pricing model; CAPM; asset pricing; risk–return paradigm; investment theory; portfolio theory; theory of portfolio choice; portfolio selection; competitive asset market; perfect competition; heterogeneous beliefs; William Sharpe; John Lintner; Jan Mossin; Jack Treynor; Fischer Black; Harry Markowitz; Bernell Stone; Michael Guth; Edward Miller; Joseph Williams; Benoit Mandelbrot; Hersh Shefrin;
Find related papers by JEL classification:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- D46 - Microeconomics - - Market Structure and Pricing - - - Value Theory
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
- J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
- N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-04 (All new papers)
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