An Evaluation of CAPM’s validity in the Romanian Stock Exchange

Abstract

The present study tries to test the validity of the capital asset pricing model (CAPM) in the Bucharest Stock Exchange Market from Romania. The tested period for this study covers 3 years from 2011 to 2013. The sample is composed by 20 companies listed at the Bucharest Stock Exchange. The relationship between risk and expected return is being examined. It was found that the security market line’s slope is downwards sloping and negative and so it was concluded that CAPM does not hold. As a general conclusion there is a weak practical implication of the Capital Asset Pricing Model in Romanian stock market. Thus, other important variables should be considered to find an effective and appropriate pricing mechanism.

Keywords

• capital asset pricing model
• Stock Exchange Market