Akhilesh Kumar (15913)

Ramit Gupta (15949)

Rajat Kashyap Kumar (15850)

Security Analysis & Portfolio Management

(Ms. Vibhuti Vashishth)
Class Project
BFIA-III
2010-11
S.S. College of Business Studies, Univ. of Delhi

Testing CAPM's applicability on Indian stocks

Synopsis

The study intends to statistically test the applicability of the Capital Asset Pricing Model on Indian stocks.
Individual stocks are chosen in spite of the assumption of investors holding efficient-diversified portfolio
because securities are assumed to be priced in line with expected returns stated by the CAPM.

The study finds educated passes through the ‘non-testable’ CAPM and argues that returns should not be
calculated net of transaction costs and taxes because firms when deciding the cost of equity will not
revise expected returns upward to compensate for such costs. Moreover, long-term holding period will
by itself overcome the problem of transaction costs.

The study also combines the included stocks to form a portfolio in an attempt to capture the effect of
diversification. A broad-based stock market index has been taken as a proxy to the market universe.

The study concludes through conducting hypothesis tests on abnormal return and alpha that CAPM is
applicable on individual stocks.

In addition, the study compares individual stocks and both portfolios for risk-adjusted returns through
Sharpe Ratio and Treynor Ratio and finds out that diversified portfolios rank high on standard deviation-
adjusted returns, reflecting that it is better to hold diversified portfolios than holding individual stocks.

Please note that: Presentation and Excel workbook is attached alongwith