The CAPM describes a relationship between risk and expected forward-looking returns. Existing research tests the model using realized returns as the proxy for ex-ante expectations. However, recent studies cast doubt on the ability of ex-post observed returns to proxy for ex-ante expectations. Using an alternative specification to proxy for investor expectations, I test the CAPM in the context of pricing size and book/market equities. The results indicate that the CAPM retains additional merit with an improved measure of expectations. However, the value premium appears large and significant across both specifications of expected returns.
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