Seduced by Symmetry, Smarter by Half

James Ming Chen
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James Ming Chen: Michigan State University

Chapter Chapter 4 in Postmodern Portfolio Theory, 2016, pp 41-58 from Palgrave Macmillan

Abstract: 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

Keywords: Stock Return; Asset Price; Supra Note; Systematic Risk; Prospect Theory (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:pal:qpochp:978-1-137-54464-3_4

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DOI: 10.1057/978-1-137-54464-3_4

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