Article1986

Risk, Return, and Equilibrium: A Revisit

179 citations0/0 files storedJournal of Political Economy

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Risk and Volatility Modeling

Abstract

This paper reports the results of tests of the major implications of the two-parameter capital asset pricing model. The findings indicate that the relationship between stock returns and systematic risk contains important nonlinearities during 1935-82. These nonlinearities cannot be ascribed to previously documented anomalies related to firm size or January seasonality. Moreover, the test results appear to be sensitive to the choice of the proxy for the market portfolio.

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1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1973Risk, Return, and Equilibrium: Empirical Tests 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1981The relationship between return and market value of common stocks 1972Capital Market Equilibrium with Restricted Borrowing 1977A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory 1977INVESTMENT PERFORMANCE OF COMMON STOCKS IN RELATION TO THEIR PRICE‐EARNINGS RATIOS: A TEST OF THE EFFICIENT MARKET HYPOTHESIS

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