This paper re-examines the tests of the Sharpe-Lintner Capital Asset Pricing Model (CAPM). The null that the CAPM intercepts are zero is tested for ten size-based stock portfolios and for twenty five book-to-market sorted portfolios using five-year, ten-year and longer sub-periods during 1965-2004. The paper shows that the evidence for rejecting the CAPM on statistical grounds is weaker than th...

We show that Black Capital Asset Pricing Model (Black CAPM) is extremely sensitive to the choice of the market portfolio and becomes unstable as market portfolios approach the Global Minimum-Variance portfolio. When market portfolios approach the minimum-variance portfolio, the expected return on the zero beta asset approaches negative infinity and its variance increases rapidly. Moreover, expe...

We extend the Consumption-based CAPM (C-CAPM) model for representative agents with different risk attitudes. We introduce the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and provide a weaker...

This paper focuses on inconsistencies arising from the use of NPV and CAPM for capital budgeting. It shows that (i) CAPM capital budgeting decision-making based on disequilibrium NPV is deductively inferred by the Capital Asset Pricing Model, (ii) the use of the disequilibrium NPV is widespread in finance both as a decision rule and as a valuation tool, (iii) the disequilibrium NPV does not gua...

We use asymptotic analysis to derive the optimal hedging strategy for an option portfolio hedged using an imperfectly correlated hedging asset with small transaction costs, both fixed per trade and proportional to the value traded. In special cases we opbtain explicit formulae. The hedging strategy involves holding a position in the hedging asset whose value lies between two bounds, which are i...