The Security Market Line bias
The Security Market Line bias
Order Description
The Security Market Line has historically been flatter than the Capital Asset Pricing
Model (CAPM) would predict (see Figure 1 below). This means that low beta stocks earn
higher abnormal returns (alphas) than high beta stocks. Discuss potential explanations
for this finding.
International Finance (ECO-M024)
Essay Topic:
The Security Market Line has historically been
atter than the Capital Asset Pricing
Model (CAPM) would predict (see Figure 1 below). This means that low beta stocks earn
higher abnormal returns (alphas) than high beta stocks. Discuss potential explanations
for this nding.
Figure 1: Fama, E., F., French, K., R., (2004). The Capital Asset Pricing
Model: Theory and Evidence. Journal of Economic Perspectives, 18, 25-