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Seduced by Symmetry, Smarter by Half

In: Postmodern Portfolio Theory

Author

Listed:
  • James Ming Chen

    (Michigan State University)

Abstract

The capital asset pricing model (CAPM) remains the dominant paradigm in financial risk management—at least among practitioners, if not among scholars.1 Courts and regulators likewise depend on the CAPM, and in so doing confer legal significance on this model.2 Once upon a time, long long ago, “the hegemony of the CAPM” could be attributed “mostly to its apparent ease of applicability and, to a lesser extent, its empirical justifications.”3 The latter excuse, at least, has withered away. Despite evidence that beta is not positively related to returns on stock,4 to say nothing of beta’s failure to account for macroeconomic5 and idiosyncratic6 factors affecting security prices and returns, much of contemporary mathematical finance still hinges on the CAPM. Even Eugene Fama, beta’s leading nemesis, has conceded that “market professionals (and academics) still think about risk in terms of market β.”7

Suggested Citation

  • James Ming Chen, 2016. "Seduced by Symmetry, Smarter by Half," Quantitative Perspectives on Behavioral Economics and Finance, in: Postmodern Portfolio Theory, chapter 0, pages 41-58, Palgrave Macmillan.
    • Handle: RePEc:pal:qpochp:978-1-137-54464-3_4
    DOI: 10.1057/978-1-137-54464-3_4
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