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The CAPM Holds, Dr. Michael Hasler, Rotman School of Management, University of Toronto
- Date
- December 03, 2018
- Time
- 2:00 PM EST - 4:00 PM EST
- Location
- Ryerson University ENG-210
Under realistic conditions, the conditional risk premium of an asset is equal to its conditional market beta times the conditional risk premium of the market (Merton, 1972). We empirically test this CAPM relation using beta-sorted portfolios, size-and-book-to-market sorted portfolios, and industry portfolios. We show that regressing an asset excess return onto the product of its conditional beta and the market excess return yields an R2 of about 80%, an intercept of zero, and a slope of one. These results provide strong evidence that a single factor explains both the level and the variation in the cross-section of returns.