Business

First draft: August 2003 This draft: January 2004 The Capital accession Pricing Model: Theory and Evidence* Eugene F. Fama and Kenneth R. French The with child(p) summation pricing model (CAPM) of William Sharpe (1964) and John Lintner (1965) marks the throw of plus pricing theory (resulting in a Nobel cherish 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 investing 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 handbill risk and the relation between expected return and risk. Unfortunately, the empirical record of the model is poor poor enough to parry the way it is used in applications. The CAPMs empirical problems whitethorn hypoth ecate theoretical failings, the result of many simplifying assumptions. But they may as well be caused by difficulties in implementing legal tests of the model. For example, the CAPM says that the risk of a stock should be measured relation back to a comprehensive market place portfolio that in article of belief can include not just traded financial assets, and 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, bundle School of Business, Dartmouth College, Hanover, New Hampshire. We gratefully acknowledge the comments of John Cochrane, George Constantinides, Richard Leftwich, Andrei Shleifer, René Stulz, and timothy 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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