IS CAPM AN EFFICIENT MODEL? ADVANCED VERSUS EMERGING MARKETS

Abstract

CAPM is one of the financial models most widely used by the investors all over the world for analyzing the correlation between risk and return, being considered a milestone in financial literature. However, in recently years it has been criticized for the unrealistic assumptions it is based on and for the fact that the expected returns it forecasts are wrong. The aim of this paper is to test statistically CAPM for a set of shares listed on New York Stock Exchange, Nasdaq, Warsaw Stock Exchange and Bucharest Stock Exchange (developed markets vs. emerging markets) and to compare the expected returns resulted from CAPM with the actually returns. Thereby, we intend to verify whether the model is verified for Central and Eastern Europe capital market, mostly dominated by Poland, and whether the Polish and Romanian stock market index may faithfully be represented as market portfolios. Moreover, we intend to make a comparison between the results for Poland and Romania. After carrying out the analysis, the results confirm that the CAPM is statistically verified for all three capital markets, but it fails to correctly forecast the expected returns. This means that the investors can take wrong investments, bringing large loses to them.

Keywords

• CAPM
• risk
• portfolio return
• capital market