IDEAS home Printed from https://ideas.repec.org/p/fip/fedmsr/165.html
   My bibliography  Save this paper

The CAPM is alive and well

Author

Listed:
  • Ravi Jagannathan
  • Zhenyu Wang

Abstract

In empirical studies of the CAPM, it is commonly assumed that, (a) the return to the value-weighted portfolio of all stocks is a reasonable proxy for the return on the market portfolio of all assets in the economy, and (b) betas of assets remain constant over time. Under these assumptions, Fama and French (1992) find that the relation between average return and beta is flat. We argue that these two auxiliary assumptions are not reasonable. We demonstrate that when these assumptions are relaxed, the empirical support for the CAPM is very strong. When human capital is also included in measuring wealth, the CAPM is able to explain 28% of the cross sectional variation in average returns in the 100 portfolios studied by Fama and French. When, in addition, betas are allowed to vary over the business cycle, the CAPM is able to explain 57%. More important, relative size does not explain what is left unexplained after taking sampling errors into account.

Suggested Citation

  • Ravi Jagannathan & Zhenyu Wang, 1993. "The CAPM is alive and well," Staff Report 165, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:165
    as

    Download full text from publisher

    File URL: http://minneapolisfed.org/research/sr/sr165.pdf
    Download Restriction: no
    File URL: http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=446
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    Keywords

    Stock - Prices; Capital;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedmsr:165. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jannelle Ruswick (email available below). General contact details of provider: https://edirc.repec.org/data/cfrbmus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.