Testing the capital asset pricing model (CAPM): The case of the nigerian securities market

Abstract

The study examines the Capital Asset Pricing Model (CAPM) for the Nigeria stock market using monthly stock returns from 10 most listed companies on the Nigeria stock exchange for the period of January 2008 to December 2009. The findings of this study are not supportive of the theory's basic statement that higher risk (beta) is associated with higher levels of stock values or returns. The CAPM's prediction for the intercept is that it should equal zero and the slope should equal the excess returns on the market stock. The results of the study refute the above hypothesis and offer evidence against the CAPM. The tests conducted to examine the non-linearity of the relationship between return and betas do not also support the hypothesis that the expected return-beta relationship is linear. Additionally, this study investigates whether the CAPM adequately captures all important determinants of returns including the residual variance of stocks. The results demonstrate that residual risk has no effect on the expected returns of stocks. Tests may provide evidence against the CAPM but they do not necessarily constitute evidence in support of any alternative model. © Medwell Journals, 2010.