Realized Value (Price), ex-post Value and Asset Pricing

The negative average realized returns, specially in Tokyo Stock Exchange during early 90s and 2000s, has triggered the arguments on the controversial use of realized return in asset pricing tests further. Recently many researchers are arguing on the alternative measure of the expected return. The reason behind the failure of the realized returns has remained unanswered, however. In the text books, the authors treat realized returns as a sample of return. We argue that realized returns cannot be the sample of returns. We redefined realized returns and the ex-post returns; and showed that the realized returns cannot be the ex-post realization of the ex-ante expectations of returns. Our paper is the first to explain the difference between the ex-post and the realized values; and also the first to present the reason behind the inability of the realized return as the ex-post realization of the ex-ante predictions.We focused on the reason behind the failure of the realized return as an estimator for the expected return. Other researchers also argued on the inability of the realized return, all of they implicitly assumed realized return as the sample of returns. We went to the basic of the asset-pricing model and showed that realized return cannot be a sample of return. Through simple graphical explanation, we can show the validity of CAPM although the average realized return is negative