empirical evidence on security returns

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1、Chapter13:EmpiricalEvidenceonSecurityReturnsChapterOpenerPART  IIIp.407INTHISCHAPTER,weconsidertheempiricalevidenceinsupportoftheCAPMandAPT.Attheoutset,however,itisworthnotingthatmanyoftheimplicationsofthesemodelsalreadyhavebeenacceptedinwidelyvaryingapplications.Considerthefo

2、llowing:1. Manyprofessionalportfoliomanagersusetheexpectedreturn–betarelationshipofsecurityreturns.Furthermore,manyfirmsratetheperformanceofportfoliomanagersaccordingtothereward-to-volatilityratiostheymaintainandtheaverageratesofreturntheyrealizerelativetotheCMLorSML.2. Regula

3、torycommissionsusetheexpectedreturn–betarelationshipalongwithforecastsofthemarketindexreturnasonefactorindeterminingthecostofcapitalforregulatedfirms.3. Courtrulingsontortscasessometimesusetheexpectedreturn–betarelationshiptodeterminediscountratestoevaluateclaimsoflostfuturein

4、come.4. ManyfirmsusetheSMLtoobtainabenchmarkhurdlerateforcapitalbudgetingdecisions.ThesepracticesshowthatthefinancialcommunityhaspassedafavorablejudgmentontheCAPMandtheAPT,ifonlyimplicitly.   Inthischapterweconsidertheevidencealongmoreexplicitandrigorouslines.Thefirstpartofthe

5、chapterpresentsthemethodologythathasbeendeployedintestingthesingle-factorCAPMandAPTandassessestheresults.ThesecondpartofthechapterprovidesanoverviewofcurrenteffortstoestablishthevalidityofmultifactorversionsoftheCAPMandAPT.Inthethirdpart,wediscussrecentliteratureonso-calledano

6、maliesinpatternsofsecurityreturnsandsomeoftheresponsestothesepuzzlingfindings.Finally,wepresentinterestingresearchonstockreturnsthatexaminesthesizeoftheequityriskpremium.Conventionalwisdomhasheldforalongtimethatthehistoryofreturnsonequitiesisquitepuzzling.Recentstudiesaddresst

7、hepuzzle.   WhylumptogetherempiricalworksontheCAPMandAPT?TheCAPMisatheoreticalconstructthatpredictsexpectedratesofreturnonassets,relativetoamarketportfolioofallriskyassets.Itisdifficulttotestthesepredictionsempiricallybecauseexpectedreturns,covariances,andtheexactmarketportfol

8、ioareunobservable(seeChapter9).Toovercomethisdifficulty,asing