Testing the CAPM on the German Stock Market
GRIN Verlag, 2007 - 72 pages
Seminar paper from the year 2005 in the subject Business economics - Investment and Finance, grade: 1,3, European Business School - International University Schloß Reichartshausen Oestrich-Winkel, course: Asset Management Seminar, 34 entries in the bibliography, language: English, abstract: Although the model is widely accepted and practically used as explained above, it is nevertheless far from being perfect as outlined in its record of empirical studies.9 Generally criticized is on the one hand that the underlying assumptions of the model are very theoretical and thus not able to illustrate reality and on the other one that there are problems in implementing well-founded tests of the model relating to the choice of the right market portfolio.10 But, the success of the CAPM will remain as long as there is no other model which offers as "[...] powerful and intuitively pleasing predictions about how to measure risk and the relation between risk and return."11 The objective of this study is to empirically test the CAPM on the German stock market. Since most of the empirical studies that have been made in the past focus on the U.S. stock market, this paper will try to find out if the results of these U.S. empirical studies can also be shown on the German stock market. Therefore, the goal of this paper is to analyze the relationship between risk and return on the German stock market to find out whether the CAPM holds.
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2,5-year period Additionally Asset Pricing Model assumptions Average excess monthly average excess return Average monthly excess beta coefficients beta estimates BLACK/JENSEN/SCHOLES 1972 Capital Asset Pricing CAPM holds Cross-sectional Regression Coefficients Denotes the intercept Denotes the slope E(Ri E(RM empirical record empirical study empirical tests estimated risk coefficients excess monthly returns expected return Fama and MacBeth FAMA/FRENCH FAMA/MACBETH 1973 Figure four subperiods free rate German stock market high beta high-risk securities hypothesis intercept term Jensen and Scholes low beta market portfolio monthly average excess monthly excess return monthly returns versus number of securities P/E ratio paper PEˆ PEROLD portfolio return REILLY/BROWN 2003 relation between risk relationship between risk returns versus systematic risk and return risk free risk return relationship risk securities risk-free rate Securities Market Line Sharpe-Lintner version standard deviation Summary of Statistics tech bubble testing the CAPM time-series regression underlined validity versus systematic risk whole period zero
Page 24 - R. (1995): The CAPM Debate, in: Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 19, No. 4, pp.
Page 24 - ERIK (2003): Beta and returns revisited — Evidence from the German stock market, in: Journal of International Financial Markets, Institutions & Money, Vol.
Page 1 - CAPITAL ASSET PRICING MODEL The capital asset pricing model (CAPM) is one of the most important contributions of financial economics.
Page 24 - E. (1970): Measurement of Portfolio Performance Under Uncertainty, in: American Economic Review, Vol. 60, No.
Page 3 - Ri, with the market return, RM, divided by the variance of the market return.
Page 23 - BREALEY, RICHARD A. / MYERS, STEWART C. (2003): Principles of Corporate Finance, 7th revised and extended Edition, New York.
Page 23 - An empirical Appraisal of Market Efficiency, in: Yale Economic Essays, Vol. 9, pp.