COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 738 "Risk and Return: Consumption Beta Versus Market Beta" N. Gregory Mankiw and Matthew D. Shapiro January 1985 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, on the other hand, 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 the beta measured with respect to a stock market index outperforms the beta
measured with respect to consumption growth. |
