Bernstein Goes to Bat for “C.R.A.P.” CAPM
Feb 20th, 2007 | Filed under: CAPM / Alpha TheoryThe weekly investment newsletter “Outside the Box” picks up where a previous edition left off - with James Montier’s assertion that “CAPM is CRAP“. This week’s edition contains an interview with Peter Bernstein and James Montier conducted by Kathryn Welling. As newsletter editor John Mauldin correctly observes, the article is “double the length of normal”. Mauldin bills the interview as “Bernstein taking on (Montier’s) criticism of CAPM”. But unfortunately for those pining for a grudge-match (like us), there seems to be a lot of agreement between Montier and Bernstein.
As you may recall, Montier argues that CAPM is too theoretical to be of any use. He reiterates his position to Welling:
“CAPM is still the only thing that is taught in business schools around the world–perhaps with arbitrage pricing theory, but the central formula is the same there. So students still come out with their MBAs, having been drilled in CAPM, and practitioners still use these models. Yet I can’t help but think that the behavioral critiques that have been leveled at a lot of your “capital ideas” do actually invalidate the use of CAPM, for instance, in all sorts of ways.
“…whilst Peter is emphasizing the benefits that CAPM has provided in terms of alpha and beta separation, I suspect those benefits are probably clearer on paper than they are in practice, put it that way. But even if we accept that there are benefits from alpha and beta separation, it should also be recognized that CAPM has delivered some very undesirable side effects.”
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