Abstract
Capital Asset Pricing Model (CAPM) is one of the most important developments in the finance literature. Simply, CAPM is a model that describes the relationship between risk and expected return. The theoretical validity of CAPM is well tested and accepted but the practical validity of CAPM is in questioned. This study is designed to analyze and estimate the portfolio performance of Bangladesh stock market in a CAPM framework. For this study, monthly stock returns from 80 companies for the period of January 2005 to December 2009 are chosen. In order to examine whether the CAPM is satisfied in the portfolio or not, the 80 stocks are arranged in descending order of beta and 10 portfolios are being made of eight stocks in each. The All Share Price Index (DSI) is used as a proxy for the market portfolio and Bangladesh government 3-Month T-bill rate is used as the proxy for the risk-free asset. The results of this analysis show that the intercept terms are not significantly different from zero, linearity in the securities market line and insignificant unique risk for the 10 portfolios during the period. But, the results in term of slope contradict the CAPM hypothesis and indicate evidence against the CAPM in the portfolios. This analysis will obviously be used as a basis of reference for future investigates and the researchers and they will get proper instruction from this study.
Highlights
IntroductionThe emerging stock markets are contributing towards the sound pricing model
This study is to investigate the validity of the Capital Asset Pricing Model (CAPM) in the portfolios and the capital market behavior of Bangladesh over the period 2005-2009
This study is diferent from the previous studies because, here we find out the risk-return relationship among the portfolios of Dhaka Stock Exchange (DSE) market
Summary
The emerging stock markets are contributing towards the sound pricing model. Markowitz (1952) and Tobin (1958) were the economy by the way of Gross Domestic Product (GDP) researchers for the development of asset pricing models. Sharpe practice of well tested pricing model like Capital Asset (1964); Lintner (1965) and Mossin (1968) had Pricing Model (CAPM) in the emerging stock market is independently developed a computationally efficient and very rare. A sound and well tested and accepted expected return on an asset is linearly related to pricing model can contribute more to emerging markets systematic risk. Md. Zobaer Hasan et al / American Journal of Applied Sciences, 10 (2): 139-146, 2013 researchers (Jensen et al, 1972; Black, 1972; Fama and MacBeth, 1973) gave their supports to the standard form of CAPM. This study is to investigate the validity of the CAPM in the portfolios and the capital market behavior of Bangladesh over the period 2005-2009
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