Wednesday, July 01, 2009

How to Derive the CAPM

The following 3 minute video goes over the mathematical proof of the CAPM, taken from my lecture on Asset Pricing Theory (where you can also download the Powerpoints I'm going over, and see a much larger screen size). It is so simple you can see why 4 people independently figured it out about the same time (Mossin, Sharpe, Lintner, Treynor). Given the insights of Markowitz (the efficient frontier) and Tobin (two-fund separation theorem), it is rather trivial. You can see more videos here, related to my book Finding Alpha.

4 comments:

jsalvati said...

I am currently reading your book, and your argument seems good, but I am not personally familiar with the finance literature on this topic, so it is hard for me to be sure. One thing that would go a long way to help convince me is to find credible people to engage your argument. They don't have to agree with with your argument to make it convincing, just fail to come up with good reasons to reject it. Bonus points for finding credible people who are also bloggers to engage your argument.

Anonymous said...

Beware Falken! by leaving these three minute teasers ("porn") you risk reducing rape ("purchase")

Anonymous said...

you live in a fucking dreamworld if you still think CAPM is even remotely relevant to anything beyond academic geekhood and the members thereof. no wonder you write a blog and don't manage money

Eric Falkenstein said...

...I actually critique the CAPM and its derivatives rather severely and specifically, but first I have to describe it...
As to getting others to opine, I think that for those who understand what the equity risk premium is, this critique is simply too radical at this time to contemplate. For those who do not understand what the risk premium is, they don't care too much. However, I think it has some rather straightforward implications for those who don't care about abstract issues, because of beta arbitrage, and avoiding volatile investments that lower returns and increase volatility and covariance.