Conservative Economic Commentary

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Subject: CAPM

In finance, the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset’s non-diversifiable risk. The model takes into account the asset’s sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (?) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.
The model was introduced by Jack Treynor (1961, 1962), William Sharpe (1964), John Lintner (1965a,b) and Jan Mossin (1966) independently, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. Sharpe, Markowitz and Merton Miller jointly received the Nobel Memorial Prize in Economics for this contribution to the field of financial economics. (Wikipedia Jan 2010)

Financial economic theory

CFAs reject the Efficient Market Hypothesis

By John Schroy, on June 16th, 2009 |

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A recent poll of members of the British Chartered Financial Analyst Institute revealed that 77% of its members disagreed that investors acted rationally.

This implicit rejection of the Efficient Market Hypothesis has far reaching implications for the structure and management of capital markets, including Modern Portfolio Theory, the use of betas, the justification for index funds, and the M&M Theories.

Will the economists that proposed these theories return their Nobel prizes?

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