Evaluation of the Capital Asset Pricing Model (CAPM) Using Chinese Stock Market Data - Dissertation Example

23). It is worth noting that numerous empirical studies that have 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 analysis, 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 four 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; described 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 CAPM’s introduction, numerous efforts have since emerged to determine 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 enhancement 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 theory was realized in the 1960s when numerous researchers including William Sharpe used the Markowitz’s 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 Markowitz’s 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 underlying 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