Editorial Type:
Article Category: Research Article
 | 
Online Publication Date: 01 Jan 2011

Modified CAPM: Robust or The Bed of Procrustes?

ASA and
Page Range: 20 – 30
DOI: 10.5791/0897-1781-30.1.20
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In Greek mythology, Procrustes had an odd sense of hospitality: He abducted travelers, provided them with a generous dinner, and then invited them to spend the night in a rather special bed. He insisted the bed fit his guest to perfection. Those too tall had their legs chopped off with a sharp hatchet; those too short were stretched. In his latest book, The Bed of Procrustes, Nassim Taleb argues that those who use economic and financial models unwittingly play the part of Procrustes. Instead of changing models to fit reality, reality is distorted or ignored to fit our models. This study examines the Capital Asset Pricing Model (CAPM), Modified CAPM, Total Beta, the new Duff & Phelps risk model, and Fama French's Three Factor Model in this spirit and presents findings that may surprise many readers.

Copyright: © 2011 American Society of Appraisers
Figure 1
Figure 1

Relationship of Beta to Risk/Return

Figure 2
Figure 2

Relationship of Company Size to Risk/Return

Figure 3
Figure 3

Evidence of Small Stock Premium Flaw

Figure 4
Figure 4

Relationship of Book to Price/Value Stock to Risk/Return

Figure 5
Figure 5

Relationship of FF3FM Components to Risk/Return

Figure 6
Figure 6

Relationship of Total Beta to Risk/Return

Figure 7
Figure 7

Relationship of Total Fama French to Risk/Return

Contributor Notes

Bob Dohmeyer operates his business appraisal firm in Frisco, Texas. He earned his degree in Business/Corporate Finance from California State University at Fullerton, where he was president of the Financial Management Honor Society.

Scott Lampe advises clients on M&A matters in Seattle, Washington. He earned his MBA in Finance from the University of Texas, Austin, Texas.

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