Abstract
This paper evaluates the company performance using the CAPM Based Jensen's Alpha. The CAPM of Sharpe (1964), Lintner (1965) and Mossin is a widely used model in modern Finance to estimate cost of equity and company performance. We carried out our study for ten plantation companies listed on Colombo Stock Exchange (CSE). We used cost of equity that is calculated using CAPM to determine the Economic Value Added (EVA).The EVA measures whether the companies have created shareholders' value during the estimating period. We selected the sample period of 2000 to 2005 years and we applied the monthly ending prices of common stocks of each company for the regression. The monthly ending prices of All Share Price Index (ASPI) are used as the market proxy. To estimate the beta, we applied market model. It was found that almost all the companies have created value for their shareholders during the study period. To measure the market performance, we calculated Jensen's alpha for each company and according to Jensen's alpha we found that the market performance is not satisfactory in most plantation companies. These results are important for Corporate Managers undertaking risk calculations, for fund managers making investment decision and, amongst others, for investors who wish to assess value of their investments. DOI: 10.4038/suslj.v6i1.1690 Sabaragamuwa University Journal, vol 6, no. 1, pp 68-81
Highlights
The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) has received considerable attention in financial studies
In its simplest form, the CAPM predicts that the excess return of a stock should be proportional to the market premium
CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium
Summary
The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) has received considerable attention in financial studies. In its simplest form, the CAPM predicts that the excess return of a stock should be proportional to the market premium. The proportionality factor is known as the ‘systematic risk’ or ‘beta’ of an asset. Empirical studies on the CAPM such as Black et al (1972) and Fama and MacBeth (1973) were supportive of the implications of the model. An early study by Levy (1977) showed that if the analyst used a shorter time horizon the beta estimates were biased. Fama (1980, 1981) provided evidence that the power of macroeconomic variables in explaining the stock prices increased with increasing time length
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