The CAPM is Wanted, Dead or Alive

Abstract

Kothari, Shanken, and Sloan (1995)claim thatβs from annual returns produce a stronger positive relation betweenβand average return thanβs from monthly returns. They also contend that the relation between average return and book-to-market equity (BE/ME) is seriously exaggerated by survivor bias. We argue that survivor bias does not explain the relation between BE/ME and average return. We also show that annual and monthlyβs produce the same inferences about theβpremium. Our main point on theβpremium is, however, more basic. It cannot save the Capital asset pricing model (CAPM), given the evidence thatβalone cannot explain expected return.