The CAPM: Theoretical Validity, Empirical Intractability and Practical Applications

The capital asset pricing model (CAPM) is an ex ante concept, whereas so-called 'tests' of the CAPM are conducted ex post.The CAPM is a partial equilibrium model in which agents view the risk-free return (Rf) and the probability distribution of the future return on risky assets (Rj) as exogenous. Dempsey (2013) argues that the empirical evidence against the CAPM is so compelling that it has reached the point where the CAPM should be abandoned, possibly being replaced by an assumption that investors expect the same return on all assets, regardless of their relative risk.