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2017•SSRN Electronic JournalOpen access

The One: A Simulation Study of CAPM Market Returns

Jordan French

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Abstract

This study presents a new method for calculating beta through a back-solving process, which assumes the Capital Asset Pricing Model (CAPM) to be absolute. This process has improved asset pricing abilities and allows for the discovery of the “one-true” market returns. The market portfolio returns required for CAPM to be accurate are then calculated and compared with eight popular financial distributions and five market proxies. The overall best distribution to use for CAPM market returns is the student t-distribution. This study also contributes to the literature in that it finds the market proxies used in other studies to discredit the CAPM, namely the NYSE, are inefficient and adversely affect the results.

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What this paper is about

This study presents a new method for calculating beta through a back-solving process, which assumes the Capital Asset Pricing Model (CAPM) to be absolute. This process has improved asset pricing abilities and allows for the discovery of the “one-true” market returns. The market portfolio returns required for CAPM to be accurate are then calculated and compared with eight popular financial distributions and five market proxies. The overall best distribution to use for CAPM market returns is the student t-distribution. This study also contributes to the literature in that it finds the market proxies used in other studies to discredit the CAPM, namely the NYSE, are inefficient and adversely affect the results.

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Available abstract

This study presents a new method for calculating beta through a back-solving process, which assumes the Capital Asset Pricing Model (CAPM) to be absolute. This process has improved asset pricing abilities and allows for the discovery of the “one-true” market returns. The market portfolio returns required for CAPM to be accurate are then calculated and compared with eight popular financial distributions and five market proxies. The overall best distribution to use for CAPM market returns is the student t-distribution. This study also contributes to the literature in that it finds the market proxies used in other studies to discredit the CAPM, namely the NYSE, are inefficient and adversely affect the results.

Key concepts: Capital asset pricing model, Market portfolio, Financial economics, Portfolio, Economics, Distribution (mathematics), Econometrics, BETA (programming language)

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