Monday, September 23, 2019

The Relationship Between Risk and Expected Rate of Return in CAPM Statistics Project

The Relationship Between Risk and Expected Rate of Return in CAPM - Statistics Project Example In the opinion of Roll and Ross (1980, pp.1073-1103.), this theory had considerable significance in empirical work during the 1960s and 1970s. However further researches on this concept have questioned its reliability and authenticity of the computation of empirical constellation of asset returns; and, many related theories have detected ranges of disenchantment with the CAPM. As a result, the most widespread CAPM underwent harsh criticisms not only by the academicians but also by financial experts. In addition, empirical researchers have gathered a range of evidence against this model during the last few decades. That evidence questioned the model’s assumptions and argued the dead of the beta. Roll and Ross (1980, pp.1073-1103.) say that this situation led to the demand for a more potential theory and it caused the formulation of Arbitrage Pricing Theory (APT). Although APT was developed recently, CAPM is considered as the basis of modern portfolio theory. According to Shanke n (1982, pp.1129-1140), the ATP is not more susceptible to empirical verification than the CAPM. The author also challenges the testability of arbitrage pricing theory as he finds that the basic elements of testability strategy would not properly work in the case of this model. He also points out that the theory precludes the differentials of expected return that form the basic structure of the concept. Huberman and Wang (2005, pp. 1-18) claim that both the CAPM and APT show relation between expected returns of assets and their covariance with other random variables.

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