An Empirical Test of Capital Asset Pricing Model with reference to S&P BSE Sensex Index

Capital Asset Pricing Model (CAPM) relates expected returns from an asset and portfolio to its systematics risk (Market risk). The CAPM proposes that excess rate of return on an asset is directly proportional to its covariance (Beta) with the market return. CAPM is a widely used asset pricing model for investment analysis, whereas in late twentieth various other theories contradicted the model. Numerous studies have been conducted to test the validity of CAPM in developed markets. Besides, there are limited studies conducted for testing the CAPM in developing markets. The present study is an empirical analysis of CAPM in Indian stock market with reference to S&P BSE Sensex Index for the period of Jan 2011 to Dec 2015. The empirical analysis conducted in the study fails to substantiate the theory. The result negates the hypothesis that the beta is the only factor that determines the return from the asset. The hypothesis of CAPM, that the assets returns are linearly related to the betas of the assets and the only risk that influence the return is the systematic risk is not established. The empirical findings of the study concludes that CAPM is not valid in S&P BSE Sensex index.