The capital asset pricing model in economic perspective
The capital asset pricing model (CAPM) is theoretically incomplete in its demand-side focus, risk-averse investors and internally inconsistent homogeneous beliefs; is not conclusively supported empirically; and yet it legitimizes a notion that investors can earn higher returns by bearing undiversifiable risk. Our article does not merely extend the CAPM with more realistic assumptions, it completes its original framework by including (1) risk-taking investors in the investor population, (2) investors who can have heterogeneous expectations or beliefs - an overlooked but required condition for the CAPM to be an internally consistent and meaningful model of <italic>competitive</italic> financial asset pricing under <italic>uncertainty</italic> and (3) a positive-sloped short-run supply curve based on a reasonable interpretation of the nature of financial asset trade. Upon a complete economic interpretation, it is shown that the equilibrium (systematic) risk-rate of return relationship depends on whose aggregate trading activity dominates, risk-averse or risk-taking investors'. There is no universal, or even general, positive relationship between systematic risk and rate of return. This has far-reaching implications for investors and investment advisors who serve them.
Year of publication: |
2015
|
---|---|
Authors: | Dawson, Peter C. |
Published in: |
Applied Economics. - Taylor & Francis Journals, ISSN 0003-6846. - Vol. 47.2015, 6, p. 569-598
|
Publisher: |
Taylor & Francis Journals |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Transfer Pricing in the Decentralized Multinational Corporation
Dawson, Peter C., (2000)
-
Dawson, Peter C., (2009)
-
Transfer Pricing in the Decentralized Multinational Corporation
Dawson, Peter C., (2000)
- More ...