Does the Capital Assets Pricing Model (CAPM) Predicts Stock Market Returns in Ghana? Evidence from Selected Stocks on the Ghana Stock Exchange.

Abstract

This paper examined the applicability of CAPM in explaining the risk-return relation of selected stocks on the Ghanaian stock market for the period of January 2006 to December 2010. The test, using linear regression method, was carried out on the standard CAPM model with constant beta. The results obtained were statistically insignificant. Thus, the null hypothesis (H_o) that there are no statistically significant differences between the actual return and the predicted return series based on the CAPM estimates could not be rejected. The implication is that, the observed differences in the variables in the actual and the predicted returns were likely due to chance or other factors and not likely due to the systematic risk factors as measured by beta of the various stocks under studied.

It was also revealed that all the stocks under studied were either undervalued or overvalued.   For instance, CAL, GCB, and SCB stocks were on the average undervalued for the period reviewed. SG-SSB stock was however overvalued on the average for the period reviewed. The conclusion drawn was that the standard CAPM with constant beta could not be used to statistically explain the observed differences in the actual and estimated return series of the selected stocks.

Keywords: Under-priced, Systematic risk, Stock Exchange.