Wednesday, October 9, 2013

The Missing Risk Premium - read


Eric Falkenstein is on a mission. It is simple. He wants to take down the the foundation of finance that return and risk as measured by beta are positively related. He presents significant information through his own work and the work that has developed over years to show that the CAPM model is empirically bankrupt. A theory that does not have strong statistical support. Of course, many will say that we have known that for years, but we have still used used that as our theoretical foundation. Eric wants to shake that foundation to the core. 

This work is important because it takes all of the previous analysis that places the CAPM in dispute and puts in one place. I have ready many of these works, but the critique of CAPM is very powerful when the all of the empirical evident is looked at together. There is a problem in that we may not have a good paradigm as a replacement, but that is the way of science. We theorize, we test, we reject and then repeat.

Read this book if you want to understand the critical direction of finance. Thanks, Eric. 

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