Evaluating the validity of capm in the Egyptian stock market

Abstract EN

Measuring stocks’ expected return and determining the factors that affect this return are the main concerns of market practitioners and academic scientists.

The most famous and simplest model that is used to calculate expected return for securities under risk is; Capital Asset Pricing Model (CAPM).

The purpose of this study is to test the validity of CAPM in the Egyptian Stock Market for the period from June 2005 to June 2013 using portfolios instead of individual stock, to determine whether beta is a sufficient measure of risk according to CAPM.

The study found that CAPM didn’t hold in the Egyptian market, as beta was found to be not the only source of risk, also it was found that the intercept of CAPM was not equal to the risk free rate available in the Egyptian market.

However the results confirmed the existence of positive linear relationship between risk and return.