Analysis of Size and Momentum Anomalies in CAPM

Abstract

By assuming a linear relationship between expected returns and Beta (Beta is always positive), CAPM provides a powerful and direct prediction on how to measure the relationship between expected returns and risk [1]. However, CAPM still has drawbacks. On average, smaller companies have higher risk-adjusted returns than larger companies [2], which proves that CAPM is wrong. De Bondt and Thaler also find that CAPM cannot explain the abnormal returns between "winner" and "loser" stocks [3]. Based on the above information, this study aims to analyze size and momentum anomalies, and evaluate the performance of CAPM based on different sizes and momentum stocks.