An empirical investigation into the validity of the security market line
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The well-known CAPM (capital asset pricing model) model in finance states that return is a function of risk. The more risky a stock is, the higher the return is expected to be. One way of modeling this relationship between stock return and stock risk is with the Security Market Line. The Security Market Line is the regression line between the returns of stocks in the market and their risks, as measured by the Beta Coefficient. However, in our empirical research, this model does not fit as well as it should. This report uses historical data to examine when this financial theory does not fit the historical data and the possible factors that might affect the validity of this model from a statistical perspective.