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Risk and Return Nexus

In: Business and Management

Submitted By MimiSuhaimi
Words 1259
Pages 6
Risk and return nexus in Malaysian stock market : Empirical evidence from CAPM

SUMMARY

From my review for this paper which is Risk and Return Nexus in Malaysian Stock Market : Empirical Evidence from CAPM before this, actually this paper examines the applicability of Capital Asset Pricing Model (CAPM) in explaining the risk-return relation in the Malaysian stock market for the period of January 1995 to December 2006. The test using linear regression method, was carried out on four models : the standard CAPM model with constant beta (Model I), the standard CAPM model with time-varying beta (Model II), the CAPM model conditional on segregating positive and negative market risk premiums with constant beta (Model III), as well as the CAPM model conditional on segregating positive and negative market risk premiums with time varying beta (Model IV). Empirical results indicate that both the standard CAPM models (Model I and Model II) are statistically insignificant. However, the CAPM models conditional on segregating positive and negative market risk premiums (Model III and Model IV) are statistically significant. In addition, this study also discovers that time varying beta provides better explanatory power.

Then from the literatures that i have gone through, it can be concluded that there is no one model that can claim to have the absolute ability to predict the expected stock return. While some researchers are questioning CAPM and in favor of Fama and French (1993) three factors model, there are studies that supported the performance of the CAPM model ( market risk, size and ratio of book-to-market value of equity, expected return ). They found that return is more precisely estimated by model consisting of this three factors. There are also researchers that question the use of either model for estimation of individual expected stock returns such as Bartholdy

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