Faculty Publications

Title

Research Summary: Capitalizing on the Greatest Anomaly in Finance with Mutual Funds

Document Type

Article

Publication Date

Spring 2013

Abstract

The Capital Asset Pricing Model (CAPM), a cornerstone of asset pricing theory, states that, because company-specific risks (such as a fire in a region where a property and casualty insurance company insures a lot of properties) can be eliminated through diversification, investors should only be compensated for bearing market risk, which affects the entire financial system. While theoretically sound, numerous empirical studies have found that the CAPM fails to predict stock returns. Many practitioners consider this to be the greatest anomaly in finance.