Capital Asset Pricing Model (CAPM) and Implication for a Developing Capital Market like Nigeria: A Case Study of the Quoted Banks on Nigeria Stock Exchange, January, 2013 – December, 2014.

Abstract

This paper is on Capital Asset Pricing Model (CAPM) and implication for a developing capital market like Nigeria. The study tests the predictive power of the CAPM in determining the required rate of return of the banking sector stocks in the Nigerian Stock Market as postulated by Sharpe (1964). Given the model of CAPM as R_i = R_f + β(R_m – R_f), the beta was first estimated by regressing the monthly average prices against the NSE All Share index for each year and for each quoted bank and the CAPM returns for the fifteen banks quoted in the Nigerian stock Exchange were estimated from January, 2013 to December, 2014 covering a period of twenty four months. The actual rates of return for each of the banks stock was equally estimated and compared with the CAPM returns to find out if the stocks were correctly valued. This was done using secondary data from CBN Statistical Bulletin and the Nigerian Stock Exchange publications. The findings show that the CAPM is not a good predictor of stock returns in the banking sector as twelve of the fifteen banks shares were over-valued while three bank shares were under-valued.

Key words: Risk premium, stock Beta, CAPM required rate of return, Actual rate of stock return