Capital Asset Pricing Model (CAPM): Evidence from Nigeria

Abstract

In this paper, we apply the Capital Asset Pricing Model (CAPM) to the Nigerian stock market using weekly stock returns from 110 companies listed on the Nigerian stock exchange (NSE) from January 2007 to February 2010. In order to enhance the precision of the beta estimates and reduce the statistical problems that arise from measurement errors in individual beta estimates, the securities were combined into portfolios. The results generally invalidate the CAPM’s predictions that higher risk (beta) is associated with a higher level of return and that the intercept should be equal to zero when estimating SML. The claim by the CAPM that the slope of the Security Market Line (SML) should equal the excess return on the market portfolio is also not supported by this study. This in effect, invalidates the prediction of the CAPM as far as Nigeria is concerned.

Keywords: CAPM, Nigerian Stock Exchange, Returns, Portfolio Returns, Beta, Risk-free rate, Stocks,  Anomalies