ISSN: 2225-8329
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The testing approach for the capital asset pricing model (CAPM) is based on probability theory testing, assuming that the distribution is normal. In these conditions, we can obtain some characteristics that we want, which will ensure that the estimation that will be made is based on a maximum probability that it respects. In some cases we can test the hypothesis that, using the text t, the diagonal element is the one that interests. Usually, the Lagrange multiplier or the score test is based on the residual vector of the restricted estimators. Applying the null hypothesis in this case restricts only the intercept parameters, so that the score test can be specified or expressed clearly, regarding the ratio that exists between the parameters we calculated. Normally distributed, the data series can be and use the critical value of this distribution. This test is usually called GRS after Gibbons, Ross and Shanken, the three who founded this relationship in 1989. As for the quantity determined, which represents the average price error, it can be interpreted in terms of apparently exploitable yields. In the context of the CAPM, the three statistics should have a tendency towards zero, so that it satisfies the correlation criterion assumed and tested. It is found that some of the investment weights of the tangent portfolio may be negative. Moreover, as the number of assets could increase, it is empirically specified that the weight of assets corresponding to the portfolio with negative weights is approaching 50, that is precisely the balance and the correlation between these two estimators.
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To cite this article: Iacob, ?.V., Popovici, M., Radu, I. (2020). Model for Estimating and Testing the Maximum Probability, International Journal of Academic Research in Accounting, Finance and Management Sciences 10 (1): 220-228.
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