The Capital Asset Pricing Model

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From the very time of its development, there have been many attempts to prove the validity of the Capital Asset Pricing Model. For instance, Black, Jensen and Scholes (1972) performed a test to check if securities are priced accordingly to their systematic risk. In order to test the theory that there was a positive linear relation between the expected return and beta, instead of the individual stock, they used monthly return data and portfolios. They obtained ten portfolios of monthly returns for 35 years and ranked them by risk securities, from the highest to the lowest. This sorting technique is now regularly used in empirical checks. They discovered that the intercepts α were regularly negative for the high-risk portfolios and always…show more content…
He formulated an opinion that such proxy, when used to calculate return on the market, cannot guarantee to be mean-variance efficient. The evidence gained from examination done by Nimal and Fernando (2013) concerning Tokyo Stock Exchange (TSE) and the Colombo Stock Exchange (CSE) confirmed not only that beta is a useful tool in expanding deviations in market premium, but also that there is a relation between return and beta. However, the previous research done in the Japanese market by Yonezawa and Hin, (1992) did not confirm the validity of the CAPM. In their research, they checked monthly returns from January 1952 to December 1986 and concluded that limited diversification was the main cause of CAPM failure. Pettengill et al. (1995) suggested a new method for testing the relation between return and beta. They established a conditional model which anticipates whether the risk premium on the market index is positive or negative. When the excess return on the market index is positive there should also be a positive relationship between beta and return, and when the risk premium is negative and return also negatively connected. It is based on a fact that high beta stocks are very likely to be more sensitive to the negative risk premium and even have a lower return than low beta stocks. Their research conducted on the US market confirmed that there is a positive relation between betas and returns. The same conclusions were

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