Capital Asset Pricing Model on Nepal Stock Exchange

Abstract

Capital Assets pricing Model (CAPM) provides an equilibrium linear relationship between risk and expected return of an assets. Since, the birth of CAPM by (Treynor,1961, 1962; Sharpe, 1964; Lintner, 1965; Mossin, 1966), enormous efforts have been devoted to studies evaluating applicability of this model. Some empirical studies such as (Suare and Murohy, 1992; Black and Fisher, 1993; Daniel and timan, 1997), have appeared to be in harmony with the principles of CAPM while studies made by (Roll, 1977; Harrisetal., 2003) and so on contradict the model. The study aims on applying the capital assets pricing model (CAPM) on Nepal Stock Exchange taking monthly data for 29 companies from 2011 to 2019. All the data are collected from official site of Nepal Stock Exchange, Nepal Rastra Bank, Central Bureau of Statists.

This study is based on secondary data. For the purpose of this analysis, this study has used approach methods as describe by Black, Jensen and Scholes(1972) time series test, Fama and MacBeth (1973) cross-sectional test and regression model of CAPM. The CAPM study is conducted by dividing the study period as 10 different year of one year each and for long period consisting of whole study period. The both short period and long period analysis of CAPM gives the mixed results and couldn’t provide conclusive evidence in support of CAPM. The study found negative beta value in some of the stock and portfolio which mean their return that moves in the opposite direction from the stock market. This study also found that portfolio with higher beta and lower beta has positive and negative constant values respectively, which suggest that the portfolio with higher beta has bagged more return than CAPM predicted and portfolio with lower beta has bagged less return than CAPM predicted. The data did not provide evidence that higher beta yields higher return while slope of SML is negative and downward sloping.