CAPM’s Origins, Its Early Variants, and the Betting Against Beta Strategy
Summary
This historical overview traces the independent development of the Capital Asset Pricing Model by Jack Treynor, William Sharpe, John Lintner, and Jan Mossin. It connects their different starting points to portfolio selection and corporate finance, and explains why Treynor’s early work was recognized much later. The article also describes how the initial models were eventually understood to be mathematically equivalent despite their different presentations.
The discussion then turns to empirical challenges to the standard CAPM, including evidence that the security market line was flatter than the model predicted. It introduces Black’s zero-beta version, which drops the risk-free asset assumption, and summarizes the later funding-constraints explanation for the low returns of high-beta assets. Betting Against Beta is presented as a strategy that exploits this pattern across several asset classes. The article is a secondary historical account; its empirical findings are summarized rather than reproduced, and the strategy discussion does not provide implementation or risk details.
Key ideas
- Treynor, Sharpe, Lintner, and Mossin developed CAPM independently from distinct research motivations.
- Their formulations differed in presentation but were later shown to be mathematically equivalent.
- Black’s zero-beta CAPM removes the assumption that a risk-free asset is available.
- Funding constraints offer one explanation for why high-beta assets may earn lower risk-adjusted returns.
- Betting Against Beta seeks to exploit the reported relationship across multiple markets.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.