This model assumes a direct relationship between risk and return based on the rationality of investors. However, behavioral finance challenges this view, suggesting that investor behavior can lead to irregularities. A notable anomaly is the low-volatility discrepancy, which challenges the CAPM's predictions about risk and return.
Figure 1. Historical performance characteristics of US equity portfolio, July 1963 - December 2010
Source: Blitz (2012), Strategic Allocation to Premiums in the Equity Market, Journal of Index Investing