An Empirical Analysis of the Capital Asset Pricing Model

Abstract

Because of the importance of the stock market to the world economy and the rising stature of the Indian economy, we have taken an interest in the Indian stock market. After much consideration, we decided to apply the Capital Asset Pricing Model and the Asset Performance Testing Model to the Indian stock market. Due to the scarcity of scholarly works that specifically address the Bombay Stock Exchange (BSE), we narrow in on this particular market. Using information on the 30 companies that make up the BSE and seven macroeconomic variables, we feed data into regression models based on the CAPM and the APT model to forecast long returns. The Indian stock market could be more susceptible to CAMP or APT model forecasts. The only type of risk considered by the CAPM-based regression model is systemic risk. In our APT-based regression model, we use seven factors, such as daily exchange volume, volatility, and systematic risk. Using data from the Indian stock market, we find that the APT model provides a better factor explanation than the CAPM.