CAPM Investors Do Not Get Paid for Bearing Risk A Linear Relation Does Not Imply Payment for Risk

The relation between the excess return of each security and its beta, where beta is defined as its regression against the return on the market portfolio, is linear in the Sharpe-Lintner capital asset pricing model. This linear relation is often interpreted to mean that CAPM investors are paid for be...

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Bibliographic Details
Published inJournal of portfolio management Vol. 34; no. 2; pp. 91 - 94
Main Author Markowitz, Harry M.
Format Journal Article
LanguageEnglish
Published London Pageant Media 01.01.2008
Subjects
Capital assets
CAPM
Rates of return
Risk exposure
Studies
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Summary:The relation between the excess return of each security and its beta, where beta is defined as its regression against the return on the market portfolio, is linear in the Sharpe-Lintner capital asset pricing model. This linear relation is often interpreted to mean that CAPM investors are paid for bearing systematic risk. In fact, this is not a correct interpretation, because two securities may have different excess returns even though they have identical risk structures in terms of their covariances with other securities in the market. If the parameters of the CAPM are generated in a natural way, securities with the same risk structure almost surely will have different expected returns. [PUBLICATION ABSTRACT]
ISSN:0095-4918
2168-8656
DOI:10.3905/jpm.2008.701620