Testing the Empirical Validity of Capital Asset Pricing Model: Evidence from Dhaka Stock Exchange

Abstract

This study investigates the validity of Capital Asset Pricing Model (CAPM) in Dhaka Stock Exchange (DSE) for a sample of 26 companies chosen from DSE-30 index during 2012-2013. This study applied a Paired sample t-test to examine whether the CAPM predicts more accurately the expected return on a security for short run. In addition, this study used OLS regression to know whether there exists a significant liner relationship between systematic risk and rate of return of sample companies. Results show that CAPM predicts the expected return on a short term investment as there is no significant difference between average daily actual return and CAPM return for the most of the selected firms. But the results fail to confirm a significant positive relation between systematic risk and rate of return of sample stocks. The overall results demonstrate that the CAPM is completely not valid in DSE.

Md. Faruk Hossain