EFF/KRF: It is just that, an argument. We have known since the '70s that the relation between beta and average return is much flatter than predicted by the CAPM. Their measure of total volatility is highly correlated with beta. They give a behavioral story, but other stories are consistent with their results. In any case, the CAPM has other more serious problems, and we think a multifactor model is necessary to capture, for example, the value premium in average returns, which shows little relation to beta.
Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.