Testing the Validity of Capital Assets Pricing Model: Evidence from Palestinian Exchange Market

Abstract

This study aims at investigating the relationship between risk and return for the listed stocks in Palestinian exchange market. Moreover it also examines the validity of capital assets in Palestinian stock market. Thus, ordinary least square (OLS) is used to analyze data variables and to test the research hypotheses. The empirical result reveals that the intercept term of individual companies is insignificantly different from zero and the slope is equal to the excess return of market index. This result proves significant relationship between risk and return. Moreover, the findings conclude that the higher beta is not associated with higher level of individual stock return. This indicates that the securities market line has non-linearity relationship between risk and return. It means that CAPM is not a good predictor for stock prices in Palestinian exchange market over the selected sample period. Therefore, this relationship is not quite enough to compensate investors for their market risk because systematic risk shows a nonlinear relationship with returns during the period of study. Thus, this paper recommends other sound assets pricing model in predicting future stocks returns