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Risk and Return: Consumption Beta Versus Market Beta
N. Gregory Mankiw and Matthew D. Shapiro
The Review of Economics and Statistics
Vol. 68, No. 3 (Aug., 1986), pp. 452-459
Published by: The MIT Press
Stable URL: http://www.jstor.org/stable/1926022
Page Count: 8
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Much recent work 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 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 average return is more closely related to the beta measured with respect to a stock market index than to the beta measured with respect to consumption growth.
The Review of Economics and Statistics © 1986 The MIT Press