An empirical testing of the capital asset pricing model in Macedonian Stock Exchange

In this paper I present the results of the empirical test of the CAPM in the Macedonian Stock Exchange during the 4 year period, from 2006 to 2009. The main finding is that during this period the validity of CAPM is questioned in terms of the explanatory performance of the model to predict the positive and the linear relation between risk and return. However as the CAPM predicts it is found to exist no relation between stock returns and the non-systematic risk and that the excess return of a 0 beta asset is 0, which again is consistent with the CAPM predictions. The implication for the investors considering investing on the MSE is that relying on beta and CAPM for investment decisions may not be the best way to follow except when such an investment decision is accompanied by a fundamental analysis of the company itself--quantitative and qualitative data. Keywords : Macedonian Stock Exchange, CAPM, Empirical Tests, Beta, t-tests
1. INTRODUCTION The relation between risk and return is one of the most important issues in finance. It is widely known that investing in risky assets as opposed to risk [...]