Testing CAPM Across and Within Futures Asset Classes

Summary

The article revisits a claim that CAPM explains returns across asset classes but not within them. It corrects the comparison by using futures returns as excess returns over the risk-free rate and distinguishing standard deviation from beta, which is based on covariance with a market portfolio. The author groups futures into bonds, equities, metals, energy, and agriculture, then compares their average returns, volatility, Sharpe ratios, correlations, betas, and alphas.

The analysis uses monthly data beginning in 1983 and an equal-weighted index within each asset class. For the overall market proxy, it assigns fixed weights to the five groups, acknowledging that this is only a rough substitute for a global, market-cap-weighted portfolio. The cross-asset results broadly support the original claim, while the article introduces within-class tests as a possible source of trading signals. Its conclusions are limited by the chosen market proxy, asset definitions, and available futures histories; the supplied text ends before reporting the within-class results.

Key ideas

• CAPM relates excess returns to covariance with market returns, rather than to volatility alone.
• Futures returns are treated as excess returns over the risk-free rate in the analysis.
• The author compares five futures asset classes using monthly returns from 1983 onward.
• The market portfolio is a rough fixed-weight proxy rather than a comprehensive investable market index.
• The article proposes testing low-beta versus high-beta instruments within asset classes, but the supplied text does not show those results.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.