The Capital Asset Pricing Model: Beta and what else?

By Pham Ngoc Thach (VNP 20)

Supervisor: Dr. Vo Hong Duc


It has been 50 years since the first Capital Asset Pricing Model (CAPM) was developed by Sharpe (1964) and Lintner (1965). Similar to any other theory, CAPM has been facing with hundreds of critiques from theoreticians and empiricists. Recent evidences suggest that CAPM is still applied widely in the practice by regulators and practitioners. While the question whether CAPM is valid in relation to the estimate of stock expected return is far from completeness, the so-called alternative models have also been developed. Typical competing and substitutable models for the Sharpe-Lintner CAPM include the Fama-French three-factor model, which was recently revised to be the five-factor model; and the Carhart four-factor model. The introduction of Fama-French three-factor model has attracted scholars’ attention. However, the empirical studies related to multi factor asset pricing model in general and Fama-French three-factor model in particular present a completely mixed results. To date, in relation to the multi factor model of estimating the expected return, more than 300 explanatory factors have been attempted in empirical studies and the long list does not appear to end there. In the Vietnamese context, empirical evidences provided by Vietnamese scholars have presented the similarly ambiguous outcome.
Vietnam, together with other ASEAN economies, is on the way to achieve the dream of being a next young Tiger in ASEAN. In achieving this dream, a sale of government owned assets to the private investors, particularly in the capital-intensive energy industry, is unavoidable. The question is that how the Government of Vietnam can determine a reasonable price for the assets. Equally important, it is essential for new investors to determine how much they can earn or how risky they have to face across various industries, to make the appropriate investment decisions.
This study is conducted to achieve the following three objectives. First, an estimate of equity beta, a key input of the CAPM, is required in determining a reasonable price for Vietnamese Government’s assets in the utilities industry and the others in the process of privatization and equitization. Second, the first Risk-Return framework is developed in order to provide guidance to investors in making their investment decisions, for various industries in Vietnam. Third, as the first and preliminary attempt, this study is to test and provide a group of factors which can be used to explain the stock returns in Vietnam. This chosen factor must be supported by theory and empirical evidence.
The findings seem to be attractive to note. First, utilities businesses face a relatively lower risk in comparison with the market as the whole. Moreover, there is a divergence of the equity beta estimates for the five countries in the ASEAN including Vietnam, Singapore, Thailand, Malaysia and the Philippines. Second, the Construction and Real Estate is ranked highest in terms of risk (as a result, highest expected return), followed by Agriculture Production, Transportation and Warehousing, Manufacturing and Wholesale Trade and Retail Trade industries. The lower ranks belong to the Utilities, Accommodation and Food services, and Arts, Entertainment, and Recreation whereas the industry with lowest level of risk is Information and technology industry. These empirical findings are somewhat consistent with expectation from a leading practitioner in the area, the UBS. Third, using a combination of DuPont analysis and the Residual Income Valuation, this study provides evidence to confirm that return on equity ratio and its change are informative about stock returns. Moreover, the level of capital turnover and financial cost ratio, together with the change in capital and the change in financial cost ratio contain incremental explanatory powers in explaining returns within the capital asset pricing model framework.

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