Comments on: Dimensional Fund Advisors Part VII

By: This and That #107

This and That #107 — Fri, 29 Aug 2008 02:05:40 +0000

[...] continues his DFA series with an explanation of the CAPM theory and a slight problem with [...]

By: Preet

Preet — Tue, 26 Aug 2008 13:39:26 +0000

@ Michael James: I’ll get into a replacement model in the next few parts in the series. I say “a” replacement because there are other proposed models as well intended to replace CAPM. For the most part, CAPM’s reliance on a single risk factor (the market factor) has been it’s biggest hurdle I think – the newer models (which are still just models themselves) focus on more factors and seem to have a statistically significant increase in explanatory power for different portfolios (which I will also discuss). At a time when there was no real theories, CAPM was a giant leap – but it’s too simple and doesn’t hold up well enough when you start to dissect the market returns in different ways. That’s not to say the new models can’t be improved or are perfect – again they are just models too.

By: Michael James

Michael James — Tue, 26 Aug 2008 04:05:32 +0000

I’m aware that CAPM definitely has its deficiencies. I’ve been critical of it myself. What do you mean when you say that it has been all but invalidated?

By: Dill

Dill — Tue, 26 Aug 2008 02:44:54 +0000

You should be a professor of finance with the way you can boil down concepts so clearly and plainly. I’ve always been too intimidated to read up on CAPM, but after reading this and then checking the other sources that I was scared to get into, they make so much sense now. Thanks Preet!

By: Dimensional Fund Advisors Part VI : WhereDoesAllMyMoneyGo.com

Dimensional Fund Advisors Part VI : WhereDoesAllMyMoneyGo.com — Tue, 26 Aug 2008 00:23:28 +0000

[...] CLICK HERE TO GO TO PART VII [...]