Possibilities of application CAPM and APT for explaining stock return on the Warsaw Stock Exchange

Abstract

This paper is prepared to evaluate the CAPM and the APT model in explaining stock returns on the Warsaw stock exchange. Both of these two model are equilibrium asset pricing model. They are the most popular methods on the developed markets. The Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory are competing theories that offer different explanations of the connection between risk and return. The paper is divided into four chapters. The first chapter presents the theoretical aspects of cost of capital and its most important part for investors – the cost of equity. The second one defines the background and details like assumptions and components of Capital Asset Pricing Model. The next chapter describes the Arbitrage Pricing Theory in details, demonstrates two empirical tests on it and gives a short overview of two other multi-factor models – Fama-French 3-factor model and Carhart’s 4-factor model. The last part of this work is dedicated to the results of conducted researches. It presents twenty eight tables of regression statistics and its analysis. This work is mostly based on the internet sources, books and papers published by scientists.