Resumen de Testing the CAPM across observed and fundamental returns

Dave Berger

• The Capital Asset Pricing Model (CAPM) describes a relationship between risk and expected forward-looking returns. Existing research tests the model using realized returns as the proxy for exante expectations. However, recent studies cast doubt on the ability of expost observed returns to proxy for exante expectations. Using an alternative specification to proxy for investor expectations, I test the CAPM in the context of pricing size and book/market equities. The results indicate that the CAPM retains additional merit with an improved measure of expectations. However, the value premium appears large and significant across both specifications of expected returns.