The Benchmark Beta, CAPM, and Pricing Anomalies.

Recognizing that a part of the unobservable market portfolio is certainly observable, the author first reformulate the capital asset pricing model so that asset returns can be related to the 'benchmark' beta computed against a set of observable assets as well as the 'latent' beta computed against the remaining unobservable assets, and then shows that when the pricing effect of the latent beta is ignored, assets would appear to be systematically mispriced even if the capital asset pricing model holds. The author further shows that various pricing anomalies, such as the firm size effect and the Friend/Blume anomaly, can be, in fact, predictable consequences of the capital asset pricing model. Copyright 1994 by Royal Economic Society.