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CAPM Investors Do Not Get Paid for Bearing Risk

A Linear Relation Does Not Imply Payment for Risk

Harry M. Markowitz
The Journal of Portfolio Management Winter 2008, 34 (2) 91-94; DOI: https://doi.org/10.3905/jpm.2008.701620
Harry M. Markowitz
The president of Harry Markowitz Company, and is an adjunct professor at the Rady School of Management, University of California, in San Diego.
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Abstract

The relation between the excess return of each security and its beta, where beta is defined as its regression against the return on the market portfolio, is linear in the Sharpe-Lintner capital asset pricing model. This linear relation is often interpreted to mean that CAPM investors are paid for bearing systematic risk. In fact, this is not a correct interpretation, because two securities may have different excess returns even though they have identical risk structures in terms of their covariances with other securities in the market. If the parameters of the CAPM are generated in a natural way, securities with the same risk structure almost surely will have different expected returns.

TOPICS: Factor-based models, statistical methods, portfolio management/multi-asset allocation

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The Journal of Portfolio Management
Vol. 34, Issue 2
Winter 2008
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CAPM Investors Do Not Get Paid for Bearing Risk
Harry M. Markowitz
The Journal of Portfolio Management Jan 2008, 34 (2) 91-94; DOI: 10.3905/jpm.2008.701620

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CAPM Investors Do Not Get Paid for Bearing Risk
Harry M. Markowitz
The Journal of Portfolio Management Jan 2008, 34 (2) 91-94; DOI: 10.3905/jpm.2008.701620
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