The author acknowledges the helpful comments of Moshe Levy, Frank Fabozzi and Harry Markowitz. This study was partially financed by of the Krueger Center of Finance.
The CAPM is Alive and Well: A Review and Synthesis
Version of Record online: 7 DEC 2009
© 2009 Blackwell Publishing Ltd
European Financial Management
Volume 16, Issue 1, pages 43–71, January 2010
How to Cite
Levy, H. (2010), The CAPM is Alive and Well: A Review and Synthesis. European Financial Management, 16: 43–71. doi: 10.1111/j.1468-036X.2009.00530.x
- Issue online: 23 DEC 2009
- Version of Record online: 7 DEC 2009
- expected utility;
- Prospect Theory
Mean-Variance (M-V) analysis and the CAPM are derived in the expected utility framework. Behavioural Economists and Psychologists (BE&P) advocate that expected utility is invalid, suggesting Prospect Theory as a substitute paradigm. Moreover, they show that the M-V rule, which is the foundation of the CAPM, is not always consistent with peoples’ choices. Thus, BE&P cast doubt on the validity of expected utility paradigm and of the M-V rule, hence the CAPM is theoretically questionable. In addition, there is very little empirical support to the CAPM. We show in this study that the CAPM is theoretically valid even when one accepts the BE&P framework and even when expected utility is invalid. Moreover, within the BE&P framework there is a strong experimental support for the CAPM.