With the benefit of this GRS insight,one can see a similar interpretation of the cross-section regression tests of(CI).In this case,the test is whether the Z variables in(9)identify patterns in the returns on the LHS assets that are not explained by the assets'market betas.This again amounts to testing(but in a more restricted way)whether the market proxy is efficient in the set of portfolios that can be constructed from it and the specific LHS assets used in the tests It is clear from this discussion that time-series and cross-section regressions do not,strictly speaking,test the CAPM.What is literally tested is the efficiency of a specific proxy for the market portfolio.One might conclude from this that the CAPM has never been tested,and prospects for testing it are not good because data for the true market portfolio of invested wealth are likely beyond reach(Roll (1977)).But this criticism can be leveled at tests of any economic model when the tests use proxies for the variables called for by the model. Like the early cross-section regression tests of the CAPM,the bottom line from the early time- series regression tests of Gibbons(1982)and Stambaugh(1982)is that various market proxies seem to be efficient-(C1)and(C2)seem to hold.This is good news for the central prediction of the model.But the Sharpe-Lintner prediction that E(RM)is equal to R is consistently rejected.The relation between average return and market beta is flatter than predicted by the Sharpe-Lintner CAPM,and the variant of the CAPM analyzed by Black(1972)seems more relevant. The general success of the CAPM in early tests produced a consensus that the model,or at least the Black version,is a reasonable description of expected returns.The early empirical results,coupled with the model's simplicity and intuitive appeal,pushed the CAPM to the forefront of finance.Students were taught to use the model for many important applications,such as estimating a firm's cost of capital or the expected return on an investment manager's portfolio.And despite the more serious empirical failures discussed next,the CAPM continues to be a force among academics and practitioners alike 1111 With the benefit of this GRS insight, one can see a similar interpretation of the cross-section regression tests of (C1). In this case, the test is whether the Z variables in (9) identify patterns in the returns on the LHS assets that are not explained by the assets’ market betas. This again amounts to testing (but in a more restricted way) whether the market proxy is efficient in the set of portfolios that can be constructed from it and the specific LHS assets used in the tests. It is clear from this discussion that time-series and cross-section regressions do not, strictly speaking, test the CAPM. What is literally tested is the efficiency of a specific proxy for the market portfolio. One might conclude from this that the CAPM has never been tested, and prospects for testing it are not good because data for the true market portfolio of invested wealth are likely beyond reach (Roll (1977)). But this criticism can be leveled at tests of any economic model when the tests use proxies for the variables called for by the model. Like the early cross-section regression tests of the CAPM, the bottom line from the early time￾series regression tests of Gibbons (1982) and Stambaugh (1982) is that various market proxies seem to be efficient – (C1) and (C2) seem to hold. This is good news for the central prediction of the model. But the Sharpe-Lintner prediction that E(RzM) is equal to Rf is consistently rejected. The relation between average return and market beta is flatter than predicted by the Sharpe-Lintner CAPM, and the variant of the CAPM analyzed by Black (1972) seems more relevant. The general success of the CAPM in early tests produced a consensus that the model, or at least the Black version, is a reasonable description of expected returns. The early empirical results, coupled with the model’s simplicity and intuitive appeal, pushed the CAPM to the forefront of finance. Students were taught to use the model for many important applications, such as estimating a firm’s cost of capital or the expected return on an investment manager’s portfolio. And despite the more serious empirical failures discussed next, the CAPM continues to be a force among academics and practitioners alike