NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tests of CAPM on an International Portfolio of Bonds and Stocks

Charles Engel

NBER Working Paper No. 4598
Issued in December 1993
NBER Program(s):   IFM

This paper estimates and tests an international version of the Capital Asset Pricing Model. Investors from the U.S., Germany and Japan choose a portfolio that includes bonds and equities from each of these countries to maximize a function of the mean and variance of returns. Investors in each country evaluate returns in terms of their home currency. The CAPM does have some power in explaining ex ante returns. It predicts fairly large risk premia on the equities, but small ones on bonds. The model is rejected, however, when tested against a more general alternative that allows for more investor heterogeneity than the CAPM.

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Document Object Identifier (DOI): 10.3386/w4598

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