Capital Asset Pricing Model: Empirical Study on Dow Jones Industrial Securities

Ljubisa M. Stamatovic and Dusan S. Cvetanovic

Ekonomika, Journal for Economic Theory and Practice and Social Issues, 2011, vol. 57, issue 2

Abstract: In making an investment in an instrument, investors need to know how much risk they are taking. They have to assess whether the instrument is properly priced, or whether they are getting sufficient returns for the chance they are taking. The CAPM can be defined as ‘a mathematical model that seeks to explain the relationship between risk and return in a rational equilibrium market’ and ‘ an economic model for valuing stocks, securities, derivatives and/or assets by relating risk and expected return’. For this study, CAPM is tested using a basket of 20 randomly selected stocks from the Dow Jones Industrial index, a U.S. stock market index consisting of 30 large, industrial companies. The coverage period is from January 1997 to December 2006, which is prior to the credit crisis that engulfed the financial world back in 2007, to enable us to take a much deeper look at the CAPM. Inclusion of the post-crisis data could distort the resulting models, consequently leading to a biased evaluation of the model. The chosen proxy for the risk-free rate was the monthly rate of the 3-month Treasury Bill issued by the Treasury Department of the U.S. This would indeed be the most appropriate proxy for a risk-free rate as the U.S. is the leading economy of the world and most, if not all, of the debt instruments issued by its government are considered ‘risk-free’.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/288754/files/2-2011%20pages%20239-249.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:sereko:288754

DOI: 10.22004/ag.econ.288754

Access Statistics for this article

More articles in Ekonomika, Journal for Economic Theory and Practice and Social Issues from Society of Economists Ekonomika, Nis, Serbia
Bibliographic data for series maintained by AgEcon Search ().