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The Application of Capital Asset Pricing Model (CAPM) to Individual Securities on Ghana Stock Exchange

Finance and Development in Africa

ISBN: 978-1-78190-224-0, eISBN: 978-1-78190-225-7

Publication date: 4 December 2012


Purpose – The purpose of this chapter is to examine whether or not the Capital Asset Pricing Model (CAPM) reasonably describes the return generating process on the Ghanaian Stock Exchange using monthly return data of 19 individual companies listed on the Exchange during the period January 2000 to December 2009.

Methodology/approach – We follow a methodology similar to Jensen (1968) time series approach. Parameters are estimated using OLS. This study is designed to measure beta risk across different times by following the time series approach. The betas of the individual securities are estimated using time series data of the excess return version of the CAPM.

Findings – Our test results show that although market beta contributes to the variation in equity returns in Ghana, its contribution is not as significant as predicted by the CAPM, and in some cases very weak. Our results also reject the strictest form of the Sharpe–Lintner CAPM, but we found positive linear relationship between equity risk premium and market beta. Instead, our evidence uphold the Jensen (1968) and Jensen, Black, and Scholes (1972) versions of the CAPM.

Research limitations/implications – This study is limited to the single-factor CAPM. Future studies will extend the test to include both size and BE/ME fundamentals and factors relating to P/E ratio, momentum and liquidity.

Practical implications – Our results will make corporate managers to be cautious when using CAPM as a basis to determine cost of equity for investment appraisal purposes, and fund managers when evaluating asset and portfolio performance.

Originality/value – The CAPM is applied to individual securities instead of portfolios, since the model was developed using information on a single security.



Coffie, W. and Chukwulobelu, O. (2012), "The Application of Capital Asset Pricing Model (CAPM) to Individual Securities on Ghana Stock Exchange", Menyah, K. and Abor, J. (Ed.) Finance and Development in Africa (Research in Accounting in Emerging Economies, Vol. 12 Part B), Emerald Group Publishing Limited, Bingley, pp. 121-147.



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