In Parts One and Two of our examination of the Capital Asset Pricing Model (CAPM), we evaluated two major assumptions:
1) Market returns are properly modeled by a normal distribution
2) Beta (systematic risk) is the sole source of priced risk for an asset or portfolio of asset
As you recall, we found several weaknesses in both assumptions as they may apply to hedge funds. This time, we’ll examine the remaining assumptions underlying CAPM, and see if each is reasonable when applied to hedge fund trading.Click here for reuse options!
Copyright 2011 Eric Bank, Freelance Writer