Empirical tests of CAPM

Empirical tests of the Capital Asset Pricing Model (CAPM) evaluate whether the model accurately predicts the relationship between a stock's risk and its expected return. Researchers analyze historical market data to see if stocks with higher market risk (beta) indeed tend to have higher returns, as CAPM suggests. These tests also check whether the model accounts for other factors influencing returns. While CAPM provides a foundational framework, real-world data sometimes shows inconsistencies, indicating that additional elements may also affect returns beyond what the model predicts.