Testing the capital asset pricing model (CAPM) in the context of Vietnam stock market

Abstract

The article examines the Capital Asset Pricing Model (CAPM) for the Vietnamese stock market using weekly stock returns from 77 listed companies on the Ho Chi Minh city Stock Exchange (HOSE) for the period of June 2007 to December 2011. So as to diversify away unique risk of individual stocks and mitigate the statistical issues which may arise from estimating beta of individual stock, equally weighted portfolios are constructed. The findings of this article does not lend much support to the theory‟s basic statement that higher risk (beta) is associated with higher levels of return. Nevertheless, the model does explain the excess returns, thus support to the linear structure of t he

CAPM equation.

The CAPM predicts that the intercept of the Security Market Line should equal zero. Moreover, the slope and the excess return on market portfolio should be equal. But the result from the test does not stand for these predictions. However, it does prove that the risk-return relationship is linear and the expected return of portfolios is not affected by the residual risk. Tests may provide evidence against the CAPM but they do not necessarily constitute evidence to support other alternative model.