Asset pricing in a multifactor setting

We mathematically show that, no matter how many factors are added to the capital asset pricing model (CAPM), beta will always matter. We also show that adding more factors to a single-factor CAPM requires market risk premiums to be modeled as time varying. In addition to allowing time-varying market risk premiums, our methodology can be extended to allow for time-varying systematic risk. Our approach offers a fairly simple way to estimate expected excess returns in a multifactor setting without the use of sorting methodologies. Our critique of multifactor models is mainly due to the fact that if at least one asset in the market portfolio is sensitive to a priced factor, then the market portfolio should also be sensitive to this factor.