Interview Question: Testing CAPM

Sample Question #101 (financial econometrics)

You say you know CAPM. How do people test it?

(Comment: this terse question probes how much you really know CAPM beyond its equation)

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One Response to Interview Question: Testing CAPM

  1. Brett says:

    ANSWER
     
    The easiest test is just to regress stock excess returns on market excess returns, accounting for heteroskedasticity. The interesting questions are: 1) what market factor should you use, 2) what time period should you run the test for, and 3) what do the results really tell us. #3 is actually the most fascinating aspect of testing models like CAPM and APT, because result interpretations have generated endless debates among economists. 

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