Asset Pricing Theory And Empirical Tests

Abstract: Capital Asset Pricing Theory (CAPM) is one of the three theories of modern financial managements, and was widely used in pricing analysis and investment decision for financial assets. CAPM mainly describes the relationship about earning yield between portfolio and system risk. It displays the operation rhythm of capital market which is a great significance for both marketability and theory, and CAPM is the first equilibrium model of financial asset pricing. It clearly figures that the expected yield is the sum of the risk-free yield and the risk compensation which described the inner structure of security return. It also divides the risk into nonsystem risk and system risk. Nonsystem risk is a special risk only for some companies or industries which can be diversified from multi-asset. System risk generated from risk factors what can affects the whole market. It's an inherent risk that can not be diversified.During many years development, CAPM is still a very important theory for capital asset pricing, just because of its simple logic and very easy to connects with mainstream economics. All though many scholars are oppugn of CAPM, some economists still insist on CAPM. They provide new idea, and even try to combine CAPM with other fields. For example, Merton (1973) created Intertemporal Asset Pricing Model (ICAPM), Breeden (1979) created Clients Asset Pricing Model (CCAPM), and Ross (1976) created another very important asset pricing ----Arbitrage Pricing Theory (APT).As widely used and the outstanding meaningful of capital asset pricing, this paper do a research on theory analysis and empirical tests, try to catch the main idea of CAPM, and prepare for using CAPM on Chinese market.