Abstract
The CAPM and Fama and French (FF) three-factor pricing model are subjected to a series of tests using out of sample data, free from many of the biases present in typical testing. Data is collected from the Value Line Investment Survey allowing for survivorship and look-ahead biases to be eliminated. Further, it is argued that simple portfolio selection rules and the use of data from a source commonly consulted by investors minimizes data snooping concerns. Stronger support is found for the CAPM than that reported by FF (1992, 1996). Size and book-to-market equity (B/M) are insignificant in cross-sectional regressions, and Gibbons, Ross, and Shanken (1989) F-tests cannot reject the appropriateness of the CAPM when stocks are sorted into size and B/M portfolios. Beta, on the other hand, emerges as a powerful anomaly. Neither the CAPM nor the FF model can explain the high (low) returns on low (high) beta portfolios.
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