Is CAPM A Good Predictor Of Stock Return In The Nigerian Chemical And Paints Stocks?

Abstract

This research is on testing the predictive power of Capital Asset Pricing Model (CAPM) as enunciated by Sharpe (1964) in the determination of the required rates of return of Nigerian chemical and paints stocks that coincides with the actual rates of return. As it were, there is no clear cut understanding on the belief with particular reference to Nigerian chemical and paints stocks. In the light of the above assertion, the objective of this study is to find out the required rate of return of Nigerian chemical and paints stocks from 2000-2012 and compare them with the actual rates of return in the corresponding periods to indentify the valuation status of the stocks. Being an empirical study, analytical research design was adopted. The data used were secondary data, which were collected from the financial statements of the firms, The Nigerian Stock Exchange publications, and Central banks of Nigeria publications. The findings show that the Capital Asset Pricing Model (CAPM) as enunciated by Sharpe (1964) did not give any appropriate forecast of the returns from the Chemical and Paints sector stocks throughout the thirteen-year period of study. The CAPM made thirty-one under-valuations and sixty-five overvaluations to make a total of ninety-six misappropriations in the thirteen years period of study. Therefore, the Capital Asset Pricing Model (CAPM) is not a good predictor of stock return in the Chemical and Paints sector of the Nigerian Stock Exchange.

Keywords: historical equity market risk premium, historical equity beta, required rate of return to equity, actual market return, actual stock return.