Capital asset pricing model and variable behaviour in the Nigerian capital market

Abstract

This study establishes that there are positive relationships between CAPM’s expected return, risks (measured by β) and risk premium. The zero value of the intercept term has been tested in most capital markets the world over. Research results of analysed data of the risk-free rate of return, R_f, calculated β, expected market return, R_m (proxied by the return on Nigeria’s IBTC index fund), the excess of market return over the risk-free rate, (R_m – R_f ) and risk premium of 24 quoted firms from the Nigerian capital market using Ordinary Least Squares (OLS) revealed that the intercept term is non-zero contrary to the CAPM theory; and there exists a positive below average relationship between E(R) and β, and between E(R) and (R_m – R_f ), and between β(R_m – R_f ), the risk premium; and E(R) with evidence of strong positive correlation between β(R_m – R_f )and E(R) , and between E(R) and (R_m – R_f ) necessitating full compensation for all risks requiring increased effect of β on E(R)

Key words: CAPM, beta (β) risk premium, market return and risk-free rate.