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2017•˜The œjournal of wealth managementRequires access

The One: A Simulation of CAPM Market Returns

Jordan French

Open publisher page 13 citations

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 that the market proxies used are inefficient and adversely affect the results used in other studies to discredit the CAPM. TOPICS:Portfolio theory, portfolio construction, statistical methods

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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 that the market proxies used are inefficient and adversely affect the results used in other studies to discredit the CAPM. TOPICS:Portfolio theory, portfolio construction, statistical methods

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OpenAlex reports 13 citations for this work. Citation counts describe recorded attention and do not establish research quality.

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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 that the market proxies used are inefficient and adversely affect the results used in other studies to discredit the CAPM. TOPICS:Portfolio theory, portfolio construction, statistical methods

Key concepts: Capital asset pricing model, Market portfolio, Portfolio, Economics, Financial economics, Econometrics, Distribution (mathematics), Capital market line

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