Capital Asset Pricing Model Essay

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Week 6 Synopsis

The core of this article evaluates the effectiveness of capital asset pricing model conducted through empirical evidence. Findings suggest that observing to the CAPM we are choosing to encounter the market on our own terms of rationality, rather than the markets. Dempsey highlights the significance between the original CAPM and Blacks CAPM actually suggesting there is not much difference in the two. Dempsey has a critical view on the traditional ‘textbook’ CAPM suggesting that it is sound in theory, however there is little evidence proving that it is also sound in practice.
Furthermore Berkman comments upon this article by adding that they are few missing issues have been missed by Dempsey. The areas mention are: more sophisticated asset pricing models
Asset pricing tests that deviate from the common approach to use realized returns as a proxy for expected returns.

Looking into Benson & Faff they seem to disagree with Dempsey, although it does say that there is an agreement to an extent of Dempsey’s findings. However the article not only holds a different view with Dempsey, it claims that the work is “greatly overstated, somewhat distorted and, thus, unduly nihilism.” Benson and Faff give a more balanced evaluation of the success/failure of the CAPM and its asset pricing derivatives. This can be seen as it contributes to both sides of the argument by explain flaws and strengths. The article concludes by highlighting the significance of ‘how wrong?’

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