Is CAPM a Good Predictor Of Stock Return In The Nigerian Engineering Technology, Office Computer Equipment, Printing And Publishing 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 engineering technology, office/computer equipment, and printing/publishing sectors 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 engineering technology, office/computer equipment, and printing/publishing sectors stocks. In the light of the above assertion, the objective of this study is to find out the required rate of return of Nigerian engineering technology, office/computer equipment, and printing/publishing sectors 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 engineering technology, office/computer equipment, and printing/publishing sectors stocks throughout the thirteen-year period of study. The CAPM made twelve under-valuations and thirty-six overvaluations to make a total of forty-eight misappropriations in the thirteen years period of study in the engineering technology sector, twelve under-valuations and sixty-six overvaluations to make a total of seventy-eight misappropriations in the office/computer equipment, eighteen under-valuations and thirty-four overvaluations to make a total of fifty-two misappropriations in the printing/publishing sector. Therefore, the Capital Asset Pricing Model (CAPM) is not a good predictor of stock return in the engineering technology, office/computer equipment, and printing/publishing sectors 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.