Title	CAPM is alive and well, the / Ravi Jagannathan, Zhenyu Wang.
Creator 1	Jagannathan, Ravi.
Creator 2	Wang, Zhenyu.
Corporate Author	Federal Reserve Bank of Minneapolis. Research Dept.
Subject 1 (LCSH)	Capital assets pricing model.
Subject 1 (JEL)	G12 - General financial markets - Asset pricing ; Trading volume ; Bond interest rates
Keywords	Capital ; Stock prices
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 surprisingly strong. When human capital is also included in measuring wealth, the CAPM is able to explain 28 percent 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 percent. More important, relative size does not explain what is left unexplained after taking sampling errors into account.
Date-Created	1993-11-22
Date-Digital	2008-11-26
Identifier	19931122fedmwp517
Series	Working paper (Federal Reserve Bank of Minneapolis. Research Dept.)
Publisher	Minneapolis : Federal Reserve Bank of Minneapolis
Format	PDF
Date-Available	2010-03-23
Relation-Is Replaced By	19931100fedmsr165
Relation-Replaces	19930800fedmwp517
Bibliographic Citation	Jagannathan, Ravi and Zhenyu Wang. "The CAPM is Alive and Well." Federal Reserve Bank of Minneapolis. Research Dept. Working Papers, no. 517 (1993).