I build a price-ratio model based on the Campbell and Shiller (1988) decomposition to test which components of investor expectations best explains cross-sectional price differences. I evaluate the in- and out-of-sample performance of my model, which uses a higher-order expansion with an added...

Human capital is the largest component of aggregate wealth, but its relation to other macroeconomic and financial variables is opaque. Using historical costs or expected income, valuing human capital is characterized by substantial measurement errors. We construct a human capital index using...

Using a very large data set with more than 9,700 stocks listed on NYSE, AMEX and NASDAQ, we analyze overnight price jumps and report short-term investor overreaction to information shocks and document return reversal and predictability up to five days. For negative and positive overnight jumps,...

CAPM has come a long way, has passed the time-test, and is fast coming out as a winner despite the onslaught of both, APT and multi-factor CAPM. The bottom line is that CAPM is needed, dead or alive. If so, it does not mean that CAPM stays as, “CAPM." Downside risk in recent times has caught...

The Capital Asset Pricing Model allows to price risky financial assets, in seductive simple way, but under various theoretical assumptions. Since its inception, CAPM has been questioned due to some of its unrealistic theoretical assumption or due to its empirical failures. Academicians have been...

This teaching note shows the relationship between levered and unlevered betas and the general formulation for the cost of equity. It also shows, step by step, the procedure to estimate betas from data found in the stock market.It shows well known procedures for estimating betas: correlation...

I estimate a mean-variance efficient (MVE) portfolio assuming that the MVE frontier is spanned by optimal portfolios that fund managers offer to heterogeneous investors. Consistent with predictions of mutual fund separation, the estimated MVE portfolio can price the cross section of portfolios...

Sharpe's (1964) Capital Asset Pricing Model (CAPM) assumes that the relationship between risk and return is positive, linear and significant. However, it is not free from controversies and one of them advocates replacing CAPM's beta by downside beta based on investors' preference of downside...

Equity risk premiums are a central component of every risk and return model in finance and are a key input in estimating costs of equity and capital in both corporate finance and valuation. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in...

It is well established that value stocks outperform glamour stocks, yet considerable debate exists about whether the return differential reflects compensation for risk or mispricing. Under mispricing explanations, prices of glamour (value) firms reflect systematically optimistic (pessimistic)...