The Conditional Relationship Between Beta and Returns: A Reassessment

Several recent empirical tests of the Capital Asset Pricing Model have been based on the conditional relationship between betas and market returns. This paper shows that this method needs reconsideration. An adjusted version of this test is presented. It is then demonstrated that the adjusted technique has similar, or lower, power to the more easily implemented CAPM test of <link rid="b13">Fama and MacBeth (1973)</link> if returns are normally distributed. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.