Testability of CaPM The wide acceptance of the capm and apt makes it all more important to test their predictions empirically How does a product of abstract reasoning hold in reality? Unfortunately, the predictions of the Capm and aptare hard to test empirically -neither the market portfolio in CaPm nor the risk factor in apt is observable expected returns are unobservable. and could be time varying, volatility is not directly observable, and is time-varyingTestability of CAPM • The wide acceptance of the CAPM and APT makes it all more important to test their predictions empirically. • How does a product of abstract reasoning hold in reality? • Unfortunately, the predictions of the CAPM and APT are hard to test empirically • ---neither the market portfolio in CAPM nor the risk factor in APT is observable; • ---expected returns are unobservable, and could be time￾varying; • ---volatility is not directly observable, and is time-varying