Abstract
The capital asset pricing model is generally considered incapable of explaining the stock market behavior. I show that this conclusion is premature, and incorporating a pragmatic approach to approximating optimal Bayesian inference in the model resurrects CAPM. The adjusted CAPM internalizes the well-known size, value, and momentum effects, high-alpha-of-low-beta-stocks, accruals, low volatility anomaly, stock-split anomaly, and reverse stock-split anomaly. The market equity premium is also larger with anchoring. Immediate applications of the adjusted CAPM include improved cost of equity calculation, and improved evaluation of managed portfolio performance.
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