On the exclusion of assets from tests of the two-parameter model: A sensitivity analysis

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Abstract

This study investigates the sensitivity of tests of the CAPM to different sets of asset returns. Tests are conducted with market portfolios that include returns for bonds, real estate, and consumer durables in addition to common stocks. Even when stocks represent only 10% of the portfolio's value, inferences about the CAPM are virtually identical to those obtained with a stocks-only portfolio. In contrast, inferences are sensitive to the set of assets used in the tests.

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    ∗

    I wish to thank my Ph.D. dissertation committee — Eugene Fama (chairman), Craig Ansley, Robert Hamada, Jonathan Ingersoll, Merton Miller, Myron Scholes and Arnold Zellner — as well as Mike Gibbons, Pat Hess, Roger Ibbotson, Marc Reinganum, Bill Schwert and Jerry Warner for valuable assistance and comments. I am also grateful for comments provided by the referee. Any remaining errors are my responsibility.

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    Copyright © 1982 Published by Elsevier B.V.