The Capital Asset Pricing ModelTest of the model on the Warsaw Stock Exchange

Abstract: Since 1994 when the Warsaw Stock Exchange has been acknowledged as a full member of World Federation of Exchanges and became one of the fastest developing security markets in the region, it has been hard to find any studies relating to the assets price performance on this exchange. That is why I decided to write this paper in which the Nobel price winning theory namely the Capital Asset Pricing Model has been tested. The Capital Asset Pricing Model (or CAPM) is an equilibrium model which relates asset’s risk measured by beta to its returns. It states that in a competitive market the expected rate of return on an asset varies in direct proportion to its beta. In this paper the performance of 100 stocks traded continuously on the main market in the years 2002-2006 has been tested. I have performed three independent tests of the CAPM based on different methods and techniques to better check the validity of the theory and then compared the results. As in the case of many other studies of the Capital Asset Pricing Model, this one didn’t find a complete support for the model but couldn’t reject some of its features either.