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- Title
The CAPM is Alive and Well: A Review and Synthesis.
- Authors
Levy, Haim
- Abstract
Mean-Variance (M-V) analysis and the CAPM are derived in the expected utility framework. Behavioural Economists and Psychologists (BE&P) advocate that expected utility is invalid, suggesting Prospect Theory as a substitute paradigm. Moreover, they show that the M-V rule, which is the foundation of the CAPM, is not always consistent with peoples’ choices. Thus, BE&P cast doubt on the validity of expected utility paradigm and of the M-V rule, hence the CAPM is theoretically questionable. In addition, there is very little empirical support to the CAPM. We show in this study that the CAPM is theoretically valid even when one accepts the BE&P framework and even when expected utility is invalid. Moreover, within the BE&P framework there is a strong experimental support for the CAPM.
- Subjects
CAPITAL assets pricing model; EXPECTED utility; PROSPECTING costs; ANALYSIS of variance; ECONOMISTS; PSYCHOLOGISTS; PARADIGM (Theory of knowledge); ECONOMIC forecasting; EXPERIMENTAL programs
- Publication
European Financial Management, 2010, Vol 16, Issue 1, p43
- ISSN
1354-7798
- Publication type
Article
- DOI
10.1111/j.1468-036X.2009.00530.x