Beta and returns: Evidence from Colombo Stock Exchange

Abstract

Capital Asset Pricing Model (CAPM) is utilized to determine a theoretically suitable required rate of return of an asset and values the asset's sensitivity to non-diversifiable risk. This paper investigates the conditional relation between beta and returns in individual stock returns between January 2011 and December 2019 on the stocks listed in the Colombo Stock Exchange (CSE) using the approaches suggested by Fama & MacBeth (1973) and Pettengill et al., (1995). The population of this research includes all the companies listed in CSE and the top 50 stocks with a large market capitalization have been selected as the sample.The unconditional test procedure results show that there is no statistically significant risk-return relationship found in any test period in individual stock returns. Thus, this result is similar to the previous literature findings. The conditional tests results show that there is no significant positive (negative) risk-return relationship in individual stock returns in CSE during up (down) market months. But findings indicate a significant positive risk-return relationship in individual stock returns in upmarket periods; whereas, a significant inverse risk-return relationship is not provided in down market periods.