The CAPM is alive and well

Ravi Jagannathan and Zhenyu Wang

No 165, Staff Report from Federal Reserve Bank of Minneapolis

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.

Keywords: Stock - Prices; Capital (search for similar items in EconPapers)
Date: 1993
References: Add references at CitEc
Citations: View citations in EconPapers (30)

Downloads: (external link)
http://minneapolisfed.org/research/sr/sr165.pdf
http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=446 (application/pdf)

Related works:
Working Paper: THE CAPM IS ALIVE AND WELL (1994)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:165

Access Statistics for this paper

More papers in Staff Report from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel (kate.s.hansel@mpls.frb.org).