The Security Market Line bias

Order Description

The Security Market Line has historically been flatter than the Capital Asset Pricing

Model (CAPM) would predict (see Figure 1 below). This means that low beta stocks earn

higher abnormal returns (alphas) than high beta stocks. Discuss potential explanations

for this finding.

International Finance (ECO-M024)

Essay Topic:

The Security Market Line has historically been
atter than the Capital Asset Pricing

Model (CAPM) would predict (see Figure 1 below). This means that low beta stocks earn

higher abnormal returns (alphas) than high beta stocks. Discuss potential explanations

for this nding.

Figure 1: Fama, E., F., French, K., R., (2004). The Capital Asset Pricing

Model: Theory and Evidence. Journal of Economic Perspectives, 18, 25-

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