The CAPM assumes that asset returns are positively skewed but otherwise normal.

Question

Quizplus · Accepted Answer

As investors prefer positive returns to negative returns,a positively skewed return distribution would be favoured over a symmetric distribution or a negatively skewed distribution.Where the distribution is positively skewed,the investor has a greater probability of earning extreme positive returns than of earning extreme negative returns.This suggests the need to adjust the standard CAPM for skewness,reducing the expected return if the distribution is positively skewed,and increasing the expected return if the distribution is negatively skewed.The important characteristic of the adjusted CAPM is the reliance not on simple skewness measures,but on co-skewness with the market.

The CAPM Assumes That Asset Returns Are Positively Skewed but Otherwise