Abstract
Re-examining the ability to explain future South African banking share returns: A data envelopment analysis approach
Highlights
The capital asset pricing model (CAPM) has played a significant role in modern portfolio theory for decades
The most prominent contradiction of the SLB model is reported by Banz (1981), who found that the size effect contributes to the ability of market betas to explain the cross-section of average returns
The price-to-NAV ratio exhibited the best success rate in explaining the ex-post future share returns of Firstrand Ltd over all three investment horizons. These findings suggest that the non-financial measures, namely pure technical efficiency (VRS), scale efficiency, and total technical efficiency (CRS), outperformed the ability of financial and risk-adjusted performance ratios to explain ex-post future share returns for the six individual South African banking shares
Summary
The capital asset pricing model (CAPM) has played a significant role in modern portfolio theory for decades. Literature has shown that there are several empirical contradictions of the so-called SharpeLintner-Black (SLB) model, brought about by the assumptions that expected returns are a positive linear function of market betas and that market betas are sufficient to describe the cross-section of expected returns (Fama & French 1992). The most prominent contradiction of the SLB model is reported by Banz (1981), who found that the size effect contributes to the ability of market betas to explain the cross-section of average returns. Another contradiction can be found in the work of Bhandari (1988), who reported a positive relationship between average returns and leverage. The ‘ideal’ set of ratios is an elusive notion on which the literature has failed to reach any consensus
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