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First draft: August 2003 This draft: January 2004 The Capital amount Pricing Model: Theory and Evidence* Eugene F. Fama and Kenneth R. French The crownwork summation pricing model (CAPM) of William Sharpe (1964) and John Lintner (1965) marks the birthing of plus pricing theory (resulting in a Nobel pillaging for Sharpe in 1990). Four decades later, the CAPM is still widely used in applications, such(prenominal) as estimating the cost of capital for firms and evaluating the performance of managed portfolios. It is the centerpiece of MBA investiture courses. Indeed, it is often the only asset pricing model taught in these courses.1 The attraction of the CAPM is that it offers powerful and intuitively pleasing predictions about how to account risk and the relation between expected return and risk. Unfortunately, the semiempirical record of the model is poor poor enough to block the way it is used in applications. The CAPMs empirical problems whitethorn hypot hecate theoretical failings, the result of many simplifying assumptions. But they whitethorn as well be caused by difficulties in implementing binding tests of the model.

For example, the CAPM says that the risk of a stock should be measured relational to a comprehensive market place portfolio that in convention can include not just traded financial assets, however also consumer durables, real estate, and human capital. Even if we * Eugene F. Fama (eugene.fama@gsb.uchicago.edu) is Robert R. McCormick severalize good Professor of Finance, Graduate School of Business, University of Chicago, Chicago, Illinois. Kenneth R. French (kfrench@dartmouth.edu) is Carl E. and Catherine M . Heidt Professor of Finance, roll up Scho! ol of Business, Dartmouth College, Hanover, New Hampshire. We gratefully acknowledge the comments of John Cochrane, George Constantinides, Richard Leftwich, Andrei Shleifer, René Stulz, and herds grass Taylor. 1 Although every asset pricing model is a capital asset pricing model, the finance profession militia the acronym CAPM for the...If you want to get a full essay, order it on our website: OrderEssay.net

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