Reading: Fama-French Three Factor Model
CAPM
Capital Asset Pricing Model
Portfolio
of Stocks with Similar Betas
•After
forming portfolios of stocks with similar betas, the subsequent portfolio
returns are observed and shown in the following plot.
CAPM
Linear Function of Beta
•After
forming portfolios of stocks with similar betas, the subsequent portfolio
returns are observed and shown in the plot.
•CAPM
says expected return is positive, linear functions of beta.
•This
plot of actual data shows a positive, linear relation so the model seems to
work.
•But
CAPM says that beta is the only asset-specific factor that you need to know to
estimate expected return. Other factors should add no value in estimating
expected return.
CAPM
Linear Function of Beta
The lower plot adjusts returns for the effects of size and book to market equity.
After these factors are taken into account, there seems to be no relation between expected return and beta.
The positive linear relationship is gone.
Última modificación: martes, 14 de agosto de 2018, 08:46