{"title":"Markowitz and the CAPM","authors":"Yusif Simaan","doi":"10.1007/s10479-024-06404-8","DOIUrl":null,"url":null,"abstract":"<div><p>There has been confusion between the Mean-Variance (MV) model and the Capital Asset Pricing Model (CAPM) due to the former providing the foundation for the latter. As the validity of the CAPM was challenged, the validity of the MV model suffered by association. A core implication of the CAPM is the mean-variance efficiency of the market portfolio. This property does not hold once some CAPM assumptions are relaxed. We focus on the limitations of the CAPM’s budget constraint. Markowitz never recommended portfolio selection without using realistic constraints - like bounds on short sales and portfolio weights. When such constraints are imposed, the market portfolio loses its efficiency, and the exact linearity of asset expected returns in beta fails. We use simulation analysis to examine whether beta is predictive when the market portfolio is inefficient. We also examine the irrelevance of residual risk in asset pricing. We conclude that neither beta nor the CAPM is dead.</p></div>","PeriodicalId":8215,"journal":{"name":"Annals of Operations Research","volume":"346 1","pages":"673 - 691"},"PeriodicalIF":4.4000,"publicationDate":"2024-12-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Annals of Operations Research","FirstCategoryId":"91","ListUrlMain":"https://link.springer.com/article/10.1007/s10479-024-06404-8","RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"OPERATIONS RESEARCH & MANAGEMENT SCIENCE","Score":null,"Total":0}
引用次数: 0
Abstract
There has been confusion between the Mean-Variance (MV) model and the Capital Asset Pricing Model (CAPM) due to the former providing the foundation for the latter. As the validity of the CAPM was challenged, the validity of the MV model suffered by association. A core implication of the CAPM is the mean-variance efficiency of the market portfolio. This property does not hold once some CAPM assumptions are relaxed. We focus on the limitations of the CAPM’s budget constraint. Markowitz never recommended portfolio selection without using realistic constraints - like bounds on short sales and portfolio weights. When such constraints are imposed, the market portfolio loses its efficiency, and the exact linearity of asset expected returns in beta fails. We use simulation analysis to examine whether beta is predictive when the market portfolio is inefficient. We also examine the irrelevance of residual risk in asset pricing. We conclude that neither beta nor the CAPM is dead.
期刊介绍：
The Annals of Operations Research publishes peer-reviewed original articles dealing with key aspects of operations research, including theory, practice, and computation. The journal publishes full-length research articles, short notes, expositions and surveys, reports on computational studies, and case studies that present new and innovative practical applications.
In addition to regular issues, the journal publishes periodic special volumes that focus on defined fields of operations research, ranging from the highly theoretical to the algorithmic and the applied. These volumes have one or more Guest Editors who are responsible for collecting the papers and overseeing the refereeing process.
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