A new perspective on risk and return

Oct. 10, 2013

For the last half century, the CAPM has been a fundamental model for financial valuation and the core method for characterizing the risk reward tradeoff. Despite this, the Nobel Prize winning model garners more and more criticism. “First you teach your MBA students the CAPM, then you go to conferences and rubbish it” stated Michael Brennan an esteemed finance professor from UCLA at the SIFR Conference on Rethinking Beta.

The connection between higher risk and higher return as prescribed by Beta seems not to hold as well as we earlier assumed. Around twenty years ago, William Sharpe and his colleagues received the Nobel Prize in Economics for their previous work in modern portfolio theory. “It is sort of awkward to be in a position where people have gathered to show why all your early work was wrong,” stated William Sharpe in a comment at the SIFR conference in Stockholm at the end of August.