Paper: SSRN 481881

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper introduces and derives the mathematical formulas for the CAPM and beta, involving covariance and variance calculations, which is moderately complex. However, it lacks backtest results, code, or heavy implementation details, relying primarily on conceptual explanation and historical data charts for illustration rather than rigorous empirical testing.

Research Flowchart

  flowchart TD
  A["Research Goal: Understand Risk & Return<br>Test CAPM vs. Fama-French Model"] --> B{"Data Collection & Preparation"}
  B --> C["CRSP & Compustat Datasets"]
  C --> D["Market, Size, Value Factors"]
  D --> E["Portfolio Formation<br>Size/BM Sorted Portfolios"]
  E --> F["Computational Analysis<br>Time-Series Regressions"]
  F --> G["Key Outcomes"]
  G --> H["CAPM Fails to Explain<br>Returns (Size & Value Effects)"]
  G --> I["Fama-French 3-Factor Model<br>Significantly Improves Fit"]