CAPM has its own set of assumptions, but since it is a regression model, it should also have the same set of assumptions as would any other regression model, someone please confirm! thank you
CAPM isn’t a regression model; it’s a “state of the world” model that you could (maybe) make real-world by using regression. If you did that, as you say, your model would have assumptions and the usual limitations of regression modelling.
is it correct to say that regression models provide an ‘estimate’ while the CAPM provides an ‘equation’ ?. the capm can be re-arranged to measure the investor’s performance : Ra-Rf = alpha +beta(Rm-Rf) and this can be regressed. pls comment.
one of the CAPM assumptions is that markets are efficient and, therefore, alpha = 0 in the CAPM equation. Here is a nice summary of CAPM: http://en.wikipedia.org/wiki/Capital_asset_pricing_model
JoeyDVivre Wrote: ------------------------------------------------------- > CAPM isn’t a regression model; it’s a “state of > the world” model that you could (maybe) make > real-world by using regression. If you did that, > as you say, your model would have assumptions and > the usual limitations of regression modelling. JDV, is it a regression model or a “state of the world model” as it appears in CFAI text? I guess its the former b/c it doesn’t mention any LR assumptions… ty !