... employs the market model to test the effect of excess return on portfolio returns. The paper divides total risk into systematic and idiosyncratic risk to examine whether the degree of inefficient portfolio diversification impairs the applicability of the capital asset pricing model (CAPM). In the two‐pass...

..., discrete‐time version of Williams' capital asset pricing model that incorporates heterogeneous beliefs regarding the mean vector of rates of return and homogeneous beliefs regarding the variance‐covariance matrix of rates of return is developed. It is then employed to gauge the impact of both divergence...

... of the evaluation. Findings The paper finds that the three‐factor model provides a better description of expected returns than the Capital Asset Pricing Model (CAPM). That is, it is found that firm size and idiosyncratic volatility are related to security returns. In addition, it is noted that the findings...