Capital Asset Pricing Model (CAPM) Study in Mean-Gini Model
Keywords:Arbitrage pricing theory, Capital market line, CAPM, Gini coefficient, Mean-Gini, Mean-Variance, Risk.
The valuation of financial assets is taking on an important dimension today. It is at the heart of turbulent financial actuality as it helps in understanding and quantifying the relationship between the risk and the return on financial assets. Traditionally, the Capital Asset Pricing Model (CAPM), developed by Sharpe (1964); Lintner (1965) and Mossin (1966) has been essential for understanding this relationship. This model is unquestionably the most well-known valuation model used since its empirical validation by several studies (Black, Jensen, and Scholes (1972); Fama and James (1973)). Unfortunately, several empirical studies have weakened this model by showing the existence of various anomalies (Bantz (1981); Chan and Chen (1991); Basu (1977); Fama and French (1992); Fama and French (1993)). Later, Shalit and Yitzhaki (1984) developed an alternative based on the Mean-Gini model while retaining the main assumptions of the classic CAPM. However, instead of holding efficient medium-variance portfolios, investors build market portfolios that are effective Mean-Gini subsets. This article presents and compares the financial asset valuation models: CAPM derived from Mean-Variance and CAPM derived from Mean-Gini. The results show that the two models are very close in terms of valuation of asset returns.