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Validity of Beta in Explaining Expected Returns of Securities Listed in the Colombo Stock Exchange - Sri Lanka

Received: 26 July 2014     Accepted: 11 August 2014     Published: 30 August 2014
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Abstract

The share market has become a main source of raising funds for the entire economy. Therefore it’s important for a country to attract lucrative investors to invest in share market. At the same time, if an investor is in a position to predict the prices or returns into certain extent, it helps him to make rational decisions on the stock market dealings, which enables him to allocate resources efficiently. In line with the Capital Asset Pricing Model (CAPM), the empirical results of studies indicate that beta is a significant variable in predicting average stock returns of a stock market. This study investigates the validity of beta explaining the expected returns of securities listed in the Colombo Stock Exchange (CSE). In addition to that, this research further explore any other factors which is responsible for influencing the predictability power of forecasting share returns of companies. Companies were selected on the basis of size and liquidity of companies. Data analysis was performed by selecting 90 companies out of total 287 listed companies in the CSE covering five year period from 2008 to 2012 with a view to provide empirical evidence on CAPM, which states that expected returns on securities are a positive linear function of market beta. Conceptual model has been developed to predict expected return using Beta, Earning to Price Ratio and Company Size by applying statistical techniques such as correlation coefficient, coefficient determination and regression analysis. This study finds that beta is a significant variable in explaining average stock returns of companies. But Earning to Price Ratio and Size of the company has weak negative and weak positive relationships respectively with average security returns.

Published in Journal of Finance and Accounting (Volume 2, Issue 4)
DOI 10.11648/j.jfa.20140204.12
Page(s) 95-100
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2014. Published by Science Publishing Group

Keywords

Beta, Expected Return, Capital Asset Pricing Model, Colombo Stock Exchange

References
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[3] Bos, T., & Newbold, P. (1984). An Empirical Investigation of the Possibility of Stochastic Systematic Risk in the Market Model. Journal of Business, 35-41.
[4] Chiao, C., Hung, K., & Nwanna, G. (2004). Beta Instability of Firms: The Case of the Taiwan Stock Market During Its Financial Development. Journal of Emerging Market Finance, 37-61.
[5] Cook, T., & Rozeff, M. (1982). Size, dividends yield and co-skewness effects on stock return : Some empirical Test. University of Iowam Iowa City, IA.
[6] Docking, D., & Koch, P. (2005). Sensitivity of investor reaction to market direction and volatility: Dividend change announcements. Journal of Financial Research, 20-40.
[7] Fabozzi, F., & Francis, J. (1978). Beta as a Random Coefficient. Journal of Financial and Quantitative Analysis, 103-116.
[8] Fama, E., & French, K. (1992). The Cross-section of Expected Stock Returns. Journal of Finance, 427–465.
[9] Fama, E., & MacBeth, J. (1973). Risk,Return and Equilibrium:Empirical Tests. The Journal of Political Economy, 607-636.
[10] Gurley, J & Shaw, E. (1955). Financial Aspects of Economic Development. The American Economic Review, 515-538.
[11] Harvey, C. (1991). The World Price of Covariance Risk. Journal of Finance, 111-157.
[12] Hartono, J. (2004). “The Recency Effect of Accounting information”. Gadjah Mada International Journal of Business, Vol. 6 No. 1.
[13] Knez, P., & Ready, M. (1997). On the robustness of size and book-to-market in cross-sectional regression. Journal of Finance, 1355-1382.
[14] Lakonishok, J., & Shapiro, A. C. (1984). "Systematic Risk, Total Risk and Size as Determinants of Stock Market Returns". Journal of Banking and Finance 10, 115-132.
[15] Lee, C., & Chen, S. (1980). A Random Coefficient Model for Re-examining Risk-Decomposition Method and Risk-Return Relationship Test. Quarterly Review of Economics and Business, 58-69.
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[18] McKinnon, R. and Shaw, P.W. (1973).Money and Capital in Economic Development. Wasshington D.C. The Brookings Institution.
[19] Reinganam, R. (1982). A direct test of Roll's conjecture on the firm size effect. Journal of Finance, 27-35.
[20] Sharpe, W. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 425-442.
Cite This Article
  • APA Style

    P. M. C. Thilakarathne, Y. N. Jayasinghe. (2014). Validity of Beta in Explaining Expected Returns of Securities Listed in the Colombo Stock Exchange - Sri Lanka. Journal of Finance and Accounting, 2(4), 95-100. https://doi.org/10.11648/j.jfa.20140204.12

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    ACS Style

    P. M. C. Thilakarathne; Y. N. Jayasinghe. Validity of Beta in Explaining Expected Returns of Securities Listed in the Colombo Stock Exchange - Sri Lanka. J. Finance Account. 2014, 2(4), 95-100. doi: 10.11648/j.jfa.20140204.12

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    AMA Style

    P. M. C. Thilakarathne, Y. N. Jayasinghe. Validity of Beta in Explaining Expected Returns of Securities Listed in the Colombo Stock Exchange - Sri Lanka. J Finance Account. 2014;2(4):95-100. doi: 10.11648/j.jfa.20140204.12

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  • @article{10.11648/j.jfa.20140204.12,
      author = {P. M. C. Thilakarathne and Y. N. Jayasinghe},
      title = {Validity of Beta in Explaining Expected Returns of Securities Listed in the Colombo Stock Exchange - Sri Lanka},
      journal = {Journal of Finance and Accounting},
      volume = {2},
      number = {4},
      pages = {95-100},
      doi = {10.11648/j.jfa.20140204.12},
      url = {https://doi.org/10.11648/j.jfa.20140204.12},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20140204.12},
      abstract = {The share market has become a main source of raising funds for the entire economy. Therefore it’s important for a country to attract lucrative investors to invest in share market. At the same time, if an investor is in a position to predict the prices or returns into certain extent, it helps him to make rational decisions on the stock market dealings, which enables him to allocate resources efficiently. In line with the Capital Asset Pricing Model (CAPM), the empirical results of studies indicate that beta is a significant variable in predicting average stock returns of a stock market. This study investigates the validity of beta explaining the expected returns of securities listed in the Colombo Stock Exchange (CSE). In addition to that, this research further explore any other factors which is responsible for influencing the predictability power of forecasting share returns of companies. Companies were selected on the basis of size and liquidity of companies. Data analysis was performed by selecting 90 companies out of total 287 listed companies in the CSE covering five year period from 2008 to 2012 with a view to provide empirical evidence on CAPM, which states that expected returns on securities are a positive linear function of market beta. Conceptual model has been developed to predict expected return using Beta, Earning to Price Ratio and Company Size by applying statistical techniques such as correlation coefficient, coefficient determination and regression analysis. This study finds that beta is a significant variable in explaining average stock returns of companies. But Earning to Price Ratio and Size of the company has weak negative and weak positive relationships respectively with average security returns.},
     year = {2014}
    }
    

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  • TY  - JOUR
    T1  - Validity of Beta in Explaining Expected Returns of Securities Listed in the Colombo Stock Exchange - Sri Lanka
    AU  - P. M. C. Thilakarathne
    AU  - Y. N. Jayasinghe
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    DO  - 10.11648/j.jfa.20140204.12
    T2  - Journal of Finance and Accounting
    JF  - Journal of Finance and Accounting
    JO  - Journal of Finance and Accounting
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    EP  - 100
    PB  - Science Publishing Group
    SN  - 2330-7323
    UR  - https://doi.org/10.11648/j.jfa.20140204.12
    AB  - The share market has become a main source of raising funds for the entire economy. Therefore it’s important for a country to attract lucrative investors to invest in share market. At the same time, if an investor is in a position to predict the prices or returns into certain extent, it helps him to make rational decisions on the stock market dealings, which enables him to allocate resources efficiently. In line with the Capital Asset Pricing Model (CAPM), the empirical results of studies indicate that beta is a significant variable in predicting average stock returns of a stock market. This study investigates the validity of beta explaining the expected returns of securities listed in the Colombo Stock Exchange (CSE). In addition to that, this research further explore any other factors which is responsible for influencing the predictability power of forecasting share returns of companies. Companies were selected on the basis of size and liquidity of companies. Data analysis was performed by selecting 90 companies out of total 287 listed companies in the CSE covering five year period from 2008 to 2012 with a view to provide empirical evidence on CAPM, which states that expected returns on securities are a positive linear function of market beta. Conceptual model has been developed to predict expected return using Beta, Earning to Price Ratio and Company Size by applying statistical techniques such as correlation coefficient, coefficient determination and regression analysis. This study finds that beta is a significant variable in explaining average stock returns of companies. But Earning to Price Ratio and Size of the company has weak negative and weak positive relationships respectively with average security returns.
    VL  - 2
    IS  - 4
    ER  - 

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Author Information
  • Faculty of Commerce and Management Studies, University of Kelaniya, Sri Lanka

  • Faculty of Commerce and Management Studies, University of Kelaniya, Sri Lanka

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