Empirical Evidence Against CAPM: Relating Alphas and Returns to Betas

One of the consequences of the capital asset pricing model (CAPM) is that the expected excess return of a financial instrument is proportional to the expected excess market return. The proportionality constant, called the instrument's beta, is the coefficient in the linear least-squares fit of the excess return of the instrument with the excess return of the market. CAPM therefore implies that stocks with larger empirical estimates of beta will tend to produce larger returns. We analyze this hypothesis using the stock return data for the S&P 500 constituents from 1966 to 2010. We obtain several statistically significant results inconsistent with the hypothesis. These inconsistencies are much less pronounced during the last two decades of our dataset than before 1990.