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  • Beta, Firm Size, Book-to-Market Equity and Stock Returns

    Author(s)
    Drew, ME
    Veeraraghavan, M
    Griffith University Author(s)
    Drew, Michael E.
    Year published
    2003
    Metadata
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    Abstract
    The capital asset pricing model (CAPM), which has dominated finance theory for over thirty years, is concerned with the relationship between risk and the expected return on risky assets. According to the CAPM the market beta alone is sufficient to explain security returns and that there is a positive expected premium for investing in beta risks. However, evidence shows that the single risk factor is not quite adequate for describing the cross-section of stock returns. The current consensus is that firm size and book-to-market equity factors are pervasive risk factors besides the overall market factor. In this paper we compare ...
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    The capital asset pricing model (CAPM), which has dominated finance theory for over thirty years, is concerned with the relationship between risk and the expected return on risky assets. According to the CAPM the market beta alone is sufficient to explain security returns and that there is a positive expected premium for investing in beta risks. However, evidence shows that the single risk factor is not quite adequate for describing the cross-section of stock returns. The current consensus is that firm size and book-to-market equity factors are pervasive risk factors besides the overall market factor. In this paper we compare the explanatory power of a single index model with the multifactor asset-pricing model of Fama and French (1996) for Hong Kong, Korea, Malaysia and the Philippines. Our findings suggest that the CAPM beta alone is not sufficient to describe the cross-section of expected returns. We also find that the absolute pricing errors of the CAPM are quite large when compared with the multifactor model of Fama and French (1996). Our findings show that firm size and book-to-market equity help explain the variation in average stock returns in a meaningful manner.
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    Journal Title
    Journal of the Asia Pacific Economy
    Volume
    8
    Issue
    3
    DOI
    https://doi.org/10.1080/13547860306289
    Subject
    Applied economics
    Applied economics not elsewhere classified
    Banking, finance and investment
    Policy and administration
    Publication URI
    http://hdl.handle.net/10072/32697
    Collection
    • Journal articles

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