Using the ICAPM to estimate the cost of capital of stock portfolios: empirical evidence on the Warsaw Stock Exchange

Urbański Stanisław () and Leśkow Jacek ()
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Urbański Stanisław: AGH University of Science and Technology, Faculty of Management, 30-067 Krakow, 10 Gramatyka Street, Krakow, Poland .
Leśkow Jacek: Institute of Teleinformatics, Cracow University of Technology, 31-155 Krakow, 24 Warszawska, Krakow, Poland .

Statistics in Transition New Series, 2020, vol. 21, issue 1, 73-94

Abstract: The aim of this paper is to present the method for estimating the cost of capital of typical portfolios available on the Warsaw Stock Exchange. The authors introduce the three factor Fama-French model and its two modifications. They also apply the bootstrap method to evaluate the variability of their estimation method. The cost of capital they refer to is related to portfolios of real options linked to projects. The market returns are generated both by stock companies running such projects and by real options modifying selected projects. The estimated cost of capital can serve as a valuable indicator for investors and for managers overseeing portfolios of stocks. Also, such an indicator can serve as a general reference while making business decisions related to new. The study demonstrated that the estimated cost of capital assumes highest values for value portfolios and stock companies with high financial indicators and, at the same time, low market prices compared to their book value. By the same token, the estimated cost of capital assumes low values for growth portfolios and for stock companies characterised by low financial indicators and, at the same time, high market prices compared to their book values.

Keywords: ICAPM; cost of capital; risk premium; bootstrap method.; G11; G12 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:stintr:v:21:y:2020:i:1:p:73-94:n:10

DOI: 10.21307/stattrans-2020-005

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