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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| Published in | Journal of portfolio management Vol. 34; no. 2; pp. 91 - 94 |
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| Main Author | |
| Format | Journal Article |
| Language | English |
| Published |
London
Pageant Media
01.01.2008
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| Subjects | |
| Online Access | Get full text |
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| Abstract | 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] |
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| AbstractList | 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] |
| Author | Markowitz, Harry M. |
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| Cites_doi | 10.2307/1910098 10.2307/2977928 |
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| Copyright | Copyright Euromoney Institutional Investor PLC Winter 2008 |
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| DOI | 10.3905/jpm.2008.701620 |
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| SubjectTerms | Capital assets CAPM Rates of return Risk exposure Studies |
| Subtitle | A Linear Relation Does Not Imply Payment for Risk |
| Title | CAPM Investors Do Not Get Paid for Bearing Risk |
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