Is the CAPM valid? An Empirical Analysis in USA Stock Exchange

Abstract

Quantitative finance was born with the study of the relationship between risk and return. The CAPM is one of the most famous models to estimate the prices of risky assets. It is based on the linear relationship between the excess return and the systematic risk (β). Many studies over the years have analyzed the relationship between risk and return, some of which find weak and inconsistent results. This paper analyzes the CAPM with linear regression, highlighting its limits, and proposes a non-linear model for return estimation. The results obtained from the analysis of the NASDAQ Composite show greater reliability of the non-linear model.