Abstract
AbstractBerk and van Binsbergen (2016) have shown that the Capital Asset Pricing Model (CAPM) best represents the revealed preferences of any investor who can invest in mutual funds (i.e., all investors). This claim seems overly broad, as it applies to all asset classes. However, we show that hedge fund investors' revealed preferences are also best modeled by the CAPM. Because hedge fund investors are sophisticated and can access all assets classes, our finding supports this broad claim. Using the CAPM is rational, as we show that CAPM alpha correlates with managerial skill and predicts performance better than other multi‐factor models.
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