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Systematic risk in the capital asset pricing model for Australia: A clinical death?

By Nguyen Cong Thang (VNP 22)

Supervisor: Dr. Vo Hong Duc

Abstract

On the ground of a well-known Markowitz’s Modern Portfolio Theory, a Sharpe-Lintner Capital Asset Pricing Model (CAPM) was derived. The CAPM confirms that only systematic risk – denoted by ß (beta), does matter and investors are only compensated for taking systematic risk. Various studies demonstrated that CAPM appears to underestimate returns for low-beta assets and overestimate returns for high-beta assets. The criticism went further as FF3F is considered to estimate the asset’s return. A work by Savor and Wilson concluded that beta, or systematic risk, is still alive in the US market. This study is conducted to fill in the gap in the context of Australia. In summary, whether or not beta, or systematic risk, is alive in the Australian context depends on how portfolios are formed and macroeconomic events are classified. These fundamental issues are generally known as puzzles in asset pricing studies and multi factor model has never been proven to withstand well when different markets/time/techniques are tested.

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