The Capm Debate
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Federal Reserve Bank of Minneapolis Quarterly Review Vol. 19, No. 4, Fall 1995, pp. 2–17
The CAPM Debate
Ravi Jagannathan Visitor Research Department Federal Reserve Bank of Minneapolis and Piper Jaffray Professor of Finance Carlson School of Management University of Minnesota Ellen R. McGrattan Senior Economist Research Department Federal Reserve Bank of Minneapolis
Abstract This article describes the academic debate about the usefulness of the capital asset pricing model (the CAPM) developed by Sharpe and Lintner. First the article describes the data the model is meant to explain—the historical average returns for various types of assets over long time periods. Then the article develops a version of the CAPM and describes how it measures the risk of investing in particular assets. Finally the article describes the results of competing studies of the model’s validity. Included are studies that support the CAPM (Black; Black, Jensen, and Scholes; Fama and MacBeth), studies that challenge it (Banz; Fama and French), and studies that challenge those challenges (Amihud, Christensen, and Mendelson; Black; Breen and Korajczyk; Jagannathan and Wang; Kothari, Shanken, and Sloan). The article concludes by suggesting that, while the academic debate continues, the CAPM may still be useful for those interested in the long run.
The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
Most large U.S. companies have built into their capital budgeting process a theoretical model that economists are now debating the value of. This is the capital asset pricing model (the CAPM) developed 30 years ago by Sharpe (1964) and Lintner (1965). This model was the first apparently successful attempt to show how to assess the risk of the cash flow from a potential investment project and to estimate the project’s cost of capital, the expected rate of return that investors will demand if...
The CAPM Debate
Ravi Jagannathan Visitor Research Department Federal Reserve Bank of Minneapolis and Piper Jaffray Professor of Finance Carlson School of Management University of Minnesota Ellen R. McGrattan Senior Economist Research Department Federal Reserve Bank of Minneapolis
Abstract This article describes the academic debate about the usefulness of the capital asset pricing model (the CAPM) developed by Sharpe and Lintner. First the article describes the data the model is meant to explain—the historical average returns for various types of assets over long time periods. Then the article develops a version of the CAPM and describes how it measures the risk of investing in particular assets. Finally the article describes the results of competing studies of the model’s validity. Included are studies that support the CAPM (Black; Black, Jensen, and Scholes; Fama and MacBeth), studies that challenge it (Banz; Fama and French), and studies that challenge those challenges (Amihud, Christensen, and Mendelson; Black; Breen and Korajczyk; Jagannathan and Wang; Kothari, Shanken, and Sloan). The article concludes by suggesting that, while the academic debate continues, the CAPM may still be useful for those interested in the long run.
The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
Most large U.S. companies have built into their capital budgeting process a theoretical model that economists are now debating the value of. This is the capital asset pricing model (the CAPM) developed 30 years ago by Sharpe (1964) and Lintner (1965). This model was the first apparently successful attempt to show how to assess the risk of the cash flow from a potential investment project and to estimate the project’s cost of capital, the expected rate of return that investors will demand if...