Capital Ideas is now Chicago Booth Review but unfortunately original articles are no longer available. If you click through you will be taken to the Internet Archive site to find an archived copy.
Confused about the differing assumptions of pricing models? More than likely you know that the assumptions don’t hold very well and you probably know much research has looked at how the assumptions matter. Fama and French now provide a framework to hopefully make sense of some of this confusion. In a working paper they show that investor tastes and expectations matter. For instance, when discussing the CAPM, they conclude that with differing expectations, there is little a priori reason to expect that the market portfolio is the tangency portfolio (and hence the market portfolio may or may not be mean variance efficient, which is a central tenant of CAPM). Additionally the authors use the concept of investor disagreement (and its impact on the market portfolio) to discuss a range of topics ranging from value investing, to stock picking, and mutual fund performance. Very interesting. Not sure how they do it. Great paper after Great paper! [FinanceProfessor.com Annotation]
Authors: Eugene F. Fama, Kenneth R. French
Subjects: Finance, Industry Specific
Industry: Investment Banking
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