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Risk and Return: Consumption Beta Versus Market Beta

Matthew Shapiro and N. Gregory Mankiw ()

No 738, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Much recent work emphasizes the joint nature of the consumption decision and the portfolio allocation decision. In this paper, we compare two formulations of the Capital Asset Pricing Model. The traditional CAPM suggests that the appropriate measure of an asset's risk is the covariance of the asset's return with the market return. The consumption CAPM, on the other hand, implies that a better measure of risk is the covariance with aggregate consumption growth. We examine a cross-section of 464 stocks and find that the beta measured with respect to a stock market index outperforms the beta measured with respect to consumption growth.

Keywords: Capital asset pricing model; consumption; risk; portfolio theory (search for similar items in EconPapers)
Date: 1985-01
Note: CFP 657.
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Published in Review of Economics and Statistics (August 1986), 68(3): 453-458

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