An Empirical Study of Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in Determining the Expected Return Accuracy Level

Abstract

This study covers the two important models of pricing of securities: CAPM and APT which provides information to the investor the securities is beneficial or not from investment point of view. This study aims to examine the accuracy levels of the CAPM and APT approaches, as well as identify the suitable stocks to be chosen based on each approach. Additionally, it uses Mean Absolut Deviation (MAD) to ascertain the accuracy level of the projected return of the stock. From the calculation of expected return in CAPM and APT, there are 5 eligible stocks to be selected either based on CAPM and APT methods such as: TCS.NS, ASIANPAINT.NS, HCLTECH.NS. INFS, WIT.NS MAD APT method is more accurate than MAD CAPM in determining the expected return. Comparative analysis reveals no discernible difference between the accuracy of the APT and CAPM approaches for predicting a company's stock return on the National Stock Exchange (NSE) of India. The selection of sample size of the study is top 15 companies listed in Nifty-50 index on the basis of market Capitalization. These companies are represents the various segment of Indian economy.