Date of Award
Master of Science (MS)
Economics and Finance
Tyler J. Brough
The Capital Asset Pricing Model (CAPM) is among the earliest and most widely used security valuation models. Since its inception, CAPM has been criticized more than it has been appreciated. Although, it has been criticized both empirically and theoretically, it is still one of the most extensively used methods for the calculation of equity betas and returns throughout the globe. Among the most significant implications of the model is that the expected stock returns are determined by their corresponding level of systematic risk and not the idiosyncratic risk. According to much of the recent literature it is referred to as a ‘failed’ and ‘dead’ model. The primary purpose of this paper is the empirical examination of CAPM (Capital Asset Pricing Model) in search of a true ‘market proxy’, at which CAPM will hold. The CAPM is tested on the monthly returns (for the period January 2000 to December 2013) using twenty-four randomly selected stocks that are a part of the Standard & Poor’s 500 (S&P 500) index. The CAPM is tested by calculating the Jensen’s Alpha (intercept) using first and second pass regressions on various market proxies. The evidence does not validate standard CAPM except for the optimal market portfolio, which we found to be the true market portfolio.
Baig, Muhammad Ahmed Saleem, "The CAPM is Not Dead" (2016). All Graduate Plan B and other Reports. 775.
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