Can a firms performance be predicted two years out to earn a premium return? The following article points to an overwhelmingly "NO."...
"In calculating Delta's 2 year expected market return, we'll be utilizing the Capital Asset Pricing Model. We're utilizing the following assumptions: Beta of 0.7 (eTrade), risk-free rate of 0.62% (2-year note on June, 2010), and a 2-year market return of 33.1% (S&P 500). By the CAPM method Delta's expected rate of return should be:
1.24% + 0.7(33.1%-1.24%) = 23.54%
We can conclude that Delta's expected 2-year return since June, 2010, as calculated by the capital asset pricing model, should have been 23.54%.
Actual Returns
Historically, Delta hasn't issued dividends, making the only gain from the investment through capital gains. Had an investor invested 24 months ago, they would have lost 6.1%. These figures exclude devaluation from inflation, which represents an even steeper loss."
This article proves that methods of predicted performance are only as good as the data that is put into the CAPM equation, and that the CAPM has some fundamental flaws in the equation. The most basic flaw is the Beta. The Beta is already hard to determine and if it is not accurate the final number will be off.
In the case of Delta airlines between 2007 and 2009, systematic risk was too large and unpredictable due to the recession. This caused a -6% loss for the stock. This just shows that you can not diversify systematic risk.
http://seekingalpha.com/article/702221-airline-industry-focus-on-delta-part-2
http://www.investopedia.com/articles/06/capm.asp#axzz2JKRZULnd
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