Risk and Return : Consumption versus Market Beta / Matthew D. Shapiro, N. Gregory Mankiw, National Bureau of Economic Research.

Author
Mankiw, N. Gregory [Browse]
Format
Book
Language
English
Published/​Created
Cambridge, Massachusetts : National Bureau of Economic Research, 1984.
Description
1 online resource (31 pages).

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Author
Series
Working paper series (National Bureau of Economic Research) ; number 1399. [More in this series]
Summary note
The interaction between the macroeconomy and asset markets is central to a variety of modern theories of the business cycle. Much recentwork emphasizes the joint nature of the consumption decision and the portfolio allocation decision. In this paper, we compare two formulations of the Capital Asset Pricing Model. The traditional CAPM suggests that the appropriate measure of an asset's risk is the covariance of the asset's return with the market return. The consumption CAPM, on the other hand, implies that a better measure of risk is the covariance with aggregate consumption growth. We examine a cross section of 464 stocks and find that the beta measured with respect to a stock market index outperforms the beta measured with respect to consumption growth.
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