Review:SML Graph of=r+-r,)in (beta,return)space is a straight line called the Security Market Line: SML 0 1 If CAPM holds,every asset must be on the SML. 2010/Yichuan Liu 6
, Review: SML Graph of ri rf irm rf Graph in (beta, return) return) space is a straight line called the Security Market Line: SML rm rf 0 1 β If CAPM holds, every asset must be on the SML. 2010 / Yichuan Liu 6
Review:testing CAPM CAPM does not hold exactly ▣The regression =a,+B,(m-r)+E often give nonzero alpha. CAPM requires alpha to be zero for all assets CAPM may fail if factors other than beta affect asset returns,such as O Fama-French factors:market(beta),size,and book-to- market 2010/Yichuan Liu
f Review: testing CAPM CAPM does not hold exactly exactly The regression ri i irm rf i often give nonzero alpha. CAPM requires alpha to be zero for all assets CAPM may f i al if f t ac ors other than b t e a affect asset returns, such as oFama‐French factors: factors: market (beta), (beta), size, and book‐to‐ market 2010 / Yichuan Liu 7