Evaluation of the Capital Asset Pricing Model (CAPM) Using Chinese Dissertation

Evaluation of the Capital Asset Pricing Model (CAPM) Using Chinese Stock Market Data - Dissertation Example23). It is outlay noting that many empirical studies that come conducted in line with evaluating the model have proved to be in harmony with the CAPM principles nonetheless, some of the similar evaluations have contradicted the model. Therefore, this paper aims at studying if the CAPM principles hold for the China Stock Exchange. Among other things to be included in the compend, include i. Whether higher beta results to higher expected returns ii. Whether the zero or average intercept is equal to risk free rate and the SML slope is equal to the average risk premium iii. Whether there is an existence of linearity between the expected returns and the stock beta. The monthly stock returns of some of the firms listed in the Chinese Stock Exchange are used in the analysis. The data was obtained from January 2009 to December 2012 hence, the analysis targets a period of quad years . To test the CAPM principles in this stock market, the study will employ the use of approach methods contributed for by Black, Jensen, and Scholes as per the year 1972 set forth as the time series test. Additionally, the study shall employ the use of the 1973 Fama and MacBeth cross sectional test. From the analysis of the Chinese Stock exchange data for the period of four year in line with the above methods, it is apparent that this duty did not hold up fully with the CAPM principles. ... Introduction Since the CAPMs introduction, numerous efforts have since emerged to delineate the validity of the principles of the CAPM model. These evaluation studies to determine the validity of the CAPM principles have led to a unique valuable contribution and breakthrough to the global financial economics. Despite these contributions, it is worth noting that some empirical studies to validate the same principles have since differed with application and validity of the CAPM principles and its application in the analysis of the world financial economics (Velasco, 2001 pg. 182). Nonetheless, other studies have proved to be in harmony with the same study. The differences in these studies depicts a significant stimulating factor to the study hence, calling for a deep sweetener of the CAPM principles in line with evaluating the principles of the model using data from the Chinese Stock Exchange. 1.0.1. Brief Understanding of CAPM The significant contributions of the financial economics surmise was realized in the 1960s when numerous researchers including William Sharpe used the Markowitzs portfolio theory as his ground to develop price formation theory for the financial assets. This price formation theory is what emerged to be known as the Capital Asset Pricing Model (CAPM). It is worth noting that the theory of the Markowitzs portfolio analyzes the optimization of wealth invest in assets in variation to their risks and returns as well as providing the view on how the underly ing risks can be reduced. The CAPM formation or foundation states that investors are in a position to choose to expose their businesses to a reasonable amount risk through a series of combined