Sensitivity of Multivariate Tests of the Capital Asset-Pricing Model to the Return Measurement Interval



  • S. P. KOTHARI,


    Search for more papers by this author
    • The authors are from New York University, the University of Rochester, and Washington University, respectively. We are grateful to Yakov Amihud, Jay Shanken, and an anonymous referee for many suggestions. Puneet Handa acknowledges support from the Taggart Foundation and the Stern School of Business, NYU, New York. S. P. Kothari acknowledges support from the Managerial Economics Research Center at the Simon School and from the John M. Olin Foundation. Charles Wasley acknowledges the support of the Olin School of Business at Washington University, St. Louis.


The capital asset-pricing model's (CAPM) primary empirical implication is a positively sloped linear relation between a security's expected rate of return and its relative risk (beta). Recent research indicates that inferences about the risk-return relation are sensitive to the choice of the return measurement interval. We perform multivariate tests of the Sharpe-Lintner CAPM using monthly and annual returns on market-value-ranked portfolios. The CAPM is rejected using monthly returns, a result consistent with previous research. In contrast, we fail to reject the CAPM when annual holding period returns are used.