The Overview of Capm Essay

1974 Words Dec 1st, 2015 8 Pages
Yasmeen Iman Snow
Deforest Thompson
Gary Oha CAPM
Yasmeen Iman Snow
Deforest Thompson
Gary Oha CAPM

Contents Overview of CAPM 1 Advantages and Limitations 3 Breakthroughs and Setbacks 4 Works Cited 6

Overview of CAPM
The CAPM was introduced by Jack Treynor , William F. Sharpe , John Lintner and Jan Mossin in 1964, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory (Fama & French, 1982). Sharpe, Markowitz and Merton Miller jointly received the 1990 Nobel Memorial Prize in Economics for this contribution to the field of financial economics. Fischer Black developed another version of CAPM, called Black CAPM or zero-beta CAPM that does not
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At first the reaction to these basic assumptions were that they seem to be incredibly unrealistic, critics asked how could the outcome from this theory hold any weight using these assumptions? While the assumptions themselves can easily be the cause of failed results, implementing the model has proved difficult as well. In 1977, research conducted by Imbarine Bujang and Annuar Nassir ultimately poked holes in the CAPM model when they sorted stocks by earnings price characteristics. The findings were that stocks with higher earnings yields tended to have better returns than the CAPM would have predicted. More evidence mounted in the coming years uncovered what is now known as the size effect. Banz's study showed that small stocks as measured by market capitalization outperformed what CAPM would have expected (Fama & French, 1982).
While the research continues, the general underlying theme in all of the studies is that the financial ratios that analysts follow so closely actually contain some predictive information that is not completely captured in beta. After all, a stock's price is merely a discounted value of future cash flows in the form of earnings. CAPM is still the financial world’s front runner and most

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