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Testing the Capital Asset Pricing Model: An Econometric Approach

Testing the Capital Asset Pricing Model: An Econometric Approach

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Published by: gaziz_s on Feb 06, 2010
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KAZAKHSTAN INSTITUTE OF MANAGEMENT ECONOMICS AND STRATEGICRESEARCH
Testing the Capital AssetPricing Model: anEconometric Approach
Seilkhanov Gaziz, BAE3, 20074614ECN3184 (Section 1)Econometric Methods, Project Paper
 
Almaty, 2009
Contents
1. Introduction32. Literature Review33. Methods and Approaches54. Results75. Concluding Remarks9Used Literature10Appendix11
2Gaziz Seilkhanov, 2009
 
Section 1. Introduction
Probably one of the most widespread questions that are being asked today is“Where should the money we own have been invested in, so as not only to lose itspresent value, but, in addition, to increase our wealth?” According to all theeconomic events that are occurring in the world economy, the economy itself becomes more and more volatile. Financial sector always comes across the criticalconditions, where recessions and peaks take place.Any investor in the world is interested in gaining return from his or her investment.However, not all individuals are able to see the picture of financial instabilities, andpredict the possible future directions. Also, investors are risk-averse on average;this means that given the two alternatives of assets to invest in, individuals wouldchoose the asset that has the comparatively lower risk. Further in this paper, theterm risk would be referred to such terms as
variance, standard deviation,
and
standard error 
. There are plenty of models in Finance and Economics that are devoted toestimation of risks, and expected returns of risky and risk-free assets. Also, thereare a number of models that estimate the effects of every single asset on aninvestment portfolio, thus implying how can the optimal portfolio management beconducted. The model chosen for the following paper is called the
Capital Asset Pricing Model
(CAPM). It is one of the most widespread approaches used for valuation of assets,forecasting the future rates of return of those assets, and constructing efficientinvestment portfolios. Not the least important is that CAPM shows the relationbetween risk and return on an asset. This research project is primarily devoted to testing the Capital Asset Pricing Model.A certain process of work, done in this research, gives quiet bright results. The3Gaziz Seilkhanov, 2009

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