Is CAPM a Good Predictor of Stock Return in the Nigerian Banking 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 banking 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 banking stocks. In the light of the above assertion, the objective of this study is to find out the required rate of return of Nigerian banking stocks from 2000-2011 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 banks, The Nigerian Stock Exchange publications, and Central banks of Nigeria publications. The findings show that it was in 2007 and 2011 the CAPM correctly estimated only one bank which constitutes 5.5 percent of the banking stocks in 2007 and 2011 while it undervalued 66.7 and 72.2 percent, overvalued 27.8 and 22.2 percent in 2007 and 2011 respectively. Other years were made up of undervalued and overvalued banking stocks. Hence CAPM is not a good predictor of stock return in the Nigerian banking sector.

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