Capital Asset Pricing Model (CAPM) Analysis of Tanzanian Public Firms

Abstract

This study explores the application of the Capital Asset
Pricing Model (CAPM) to Tanzanian public firms,
focusing on the Dar es Salaam Stock Exchange (DSE).
CAPM, a cornerstone in asset pricing theory, offers a
framework to estimate expected returns based on
systematic risk, as measured by beta. Utilizing five
years of financial data (2018–2023), the study
analyzes nine publicly traded companies and
constructs 50 distinct portfolios through permutation
methods. Regression analysis reveals a positive
correlation between risk (standard deviation) and
return, confirming CAPM’s premise. Findings
indicate that higher returns are associated with higher
risks, offering investors diverse portfolio options
based on risk tolerance. Efficient portfolios are
identified along the Capital Market Line, balancing
risk and return for informed investment decisions. This
research underscores CAPM’s utility in enhancing
financial literacy and optimizing investment strategies
in Tanzania's emerging market. Recommendations
include aligning portfolio choices with individual risk
preferences and leveraging diversification for risk
mitigation.