1. © K. Cuthbertson and D. Nitzsche Figures for Chapter 8 Empirical Evidence : CAPM and APT (Quantitative Financial Economics)

2. © K. Cuthbertson and D. Nitzsche Market Betas,  i,m Mean excess return (%) 0.20.40.60.81.01.21.4 2 6 10 14 -2 0 Gov. bonds Smallest firm decile Corporate Bonds 0 CAPM prediction = line fitted through NYSE value weighted return at A OLS cross-section regression A Figure 1 : Size Sorted Value Weighted Decile Portfolio (NYSE) : US data, post 1947

3. © K. Cuthbertson and D. Nitzsche Returns sorted by BMV, within given size quintile Returns sorted by size, within given BMV quintile Figure 2 : Average Excess Returns and Market Beta (25 Size and BMV Sorted Portfolios)

4. © K. Cuthbertson and D. Nitzsche Growth stocks (ie. Low book to market for 5 different size categories) Value stocks (ie. High book to market for 5 different size categories) The two lines connect portfolios of different size categories, within a given book-to-market category. We only connect the points within the highest and lowest BMV categories. If we had joined up point for the the other BMV quintiles, the lines would show a positive relationship, like that for the value stocks – showing that the predicted returns from the Fama-French 3 factor model broadly predict average returns on portfolios sorted by size and BMV. Figure 3 : Actual and Predicted Average Returns Fama-French 3 Factor Model