Empirical analysis of capital assets pricing model (CAPM) as a tool for valuation of a company’s returns

Abstract

This research is aimed to look at the correlation between risks and expected returns as measured by Beta values of Barclays Plc and J. Sainsbury Plc both listed on the London Stock Exchange using FSTE 100 index market share price index. The Beta values were empirically analyzed, assessed and compared with the use regression analysis. The result of the findings revealed the Beta values of 0.66 and 1.68 for Sainsbury and Barclays Plc respectively with a correlation of 31.03%. This connote that Sainsbury Plc Beta values is less than one (β<1), therefore the stock price is less volatile than the greater market as a whole. While Barclays, however, had a Beta value, which is greater than one (β>1), this is regarded as aggressive shares and tends to exhibit augmented return movements compared to the index. The study also showed that the Barclays required rate of return (26.56%) is higher than that of Sainsbury Plc (10.72%) and that the Capital Asset Pricing Model (CAPM) still stands as a model that is widely used for valuation of a company’s investment and therefore recommended for the calculation of cost of capital as a tool for investment appraisal.

Keywords: Beta values, capital asset pricing model, company valuation, investment appraisal.