Capital Asset Pricing Model (CAPM) Works in the Stock Market of Bangladesh: Empirical Evidence from Sector-Wise Index of Chittagong Stock Exchange (CSE)

Abstract

The present study examines the Capital Asset Pricing Model (CAPM) in Chittagong Stock Exchange (CSE) with special orientation to 10 different sector indexes. They are such as Banking sector index, Energy sector index, Ceramic sector index, Food sector index, General Insurance sector index, Life Insurance sector index, Cement sector index, Leasing and Finance sector index, Textile sector index, ICT sector index of Chittagong Stock Exchange (CSE). Data were gathered from the Chittagong Stock Exchange (CSE) website (www.cse.combd) for the time frame of July 2016 to June 2019. From Bangladesh’s central bank website (www.centralbank.combd), the risk-free return (Rf) has been gathered. The study uses year-end closing price and dividend for 92 listed companies. The expected return is measured through Capital Asset Pricing Model (CAPM), which is developed by William Sharpe (1964). For analysis the data, Mean, percentage, ANOVA, ‘t’ test are used as statistical tools. Descriptive and Regression analysis have been done to find the results. The study is only confined to CSE. So, there is an avenue for further researchers to add Dhaka Stock Exchange (DSE) in their research project. This approach is applicable to both investors and issuers when exchanging shares of securities on the stock market. The study concludes that the CAPM is not applicable to the 10 distinct sector indices of the CSE because, at a typical level of risk, the gap between expected and actual returns is quite large. Hence, CAPM was tested separately for each year of the five years period and the results in the mentioned tables did not support the CAPM applicability.