AN INVESTIGATION RELATING TO THE APPLICATION OF CAPITAL ASSET PRICING MODEL (CAPM) IN STOCK MARKET

Abstract

Purpose – The present study aims to examine the concept of Capital Asset Pricing Model (CAPM), the mechanism of Capital Asset Pricing Model (CAPM) and evaluate its applicability as tools that Investors and Traders can use to facilitate decision making related to stocks in Stock Market. Design/methodology/approach – This paper uses secondary data to empirically examine the impact of Capital Asset Pricing Model in Stock Market. Since, Capital Asset Pricing Model occupies an important place in the Security Analysis and Portfolio Management, therefore this Model has been selected in order to bring to light the current mechanism prevailing in the Stock Market. Findings- In this paper, it has been highlighted that CAPM can be strategically used to determine whether securities are overvalued or undervalued and whether the stocks are to be purchased or sold. Application of CAPM can be truly helpful in the process of decision making and can also help in buying or selling the securities at the right time and right price. Research Implications- Application of CAPM in Stock Market carries a wide scope and this area needs to be worked on. A deeper understanding of CAPM will help investors and traders to determine optimum strategies, estimate and forecast precisely the value or the market price of the securities. Practical Implications- This study also signifies an important implication of Capital Asset Pricing Model which is estimating the market price of the stock using equilibrium return and simultaneously aims to assess the applicability of this analysis in the Stock Market. Originality- The study seeks to contribute towards the existing literature on usage of Capital Asset Pricing Model (CAPM) in Stock Market by giving a new perspective. KEYWORDS: Capital Asset Pricing Model (CAPM) , Capital Market Theory, Expected Return, Equilibrium Return, Sharpe Index Model, Stock Market