Investigating the Relationship between Risk and Return: Comparing the Traditional Capital Asset Pricing Model (CAPM) and Consumption-based Capital Asset Pricing Model (C-CAPM)

Foroghnejad, Heidar; Poriyan, Rasoul; Mirzaei, Manouchehr

Investigating the Relationship between Risk and Return: Comparing the Traditional Capital Asset Pricing Model (CAPM) and Consumption-based Capital Asset Pricing Model (C-CAPM)

Authors

Heidar Foroghnejad

rasoul poriyan

manouchehr mirzaei

Abstract

Explaining the relationship between risk and return and the capital asset pricing is an issue that has become the dominant paradigm of capital market in recent decades. In financial literature, different models have been proposed to investigate the relationship between risk and return, one of which is capital asset pricing model (CAPM).This model initially was welcomed, but after a while, has criticized and reformed by financial domain experts. Consumption based Capital Asset Pricing Model (C-CAPM) was one of the models that have been presented to eliminate weakness of Capital Asset Pricing Model.
The main purpose of this research is Comparing the performance of CAPM and C-CAPM models in explaining the relationship between stocks risk and return in Tehran Stock Exchange. To do this, a sample of 94 firms was selected among the listed firms in Tehran Stock Exchange during 1380-1389(2001-2010). Also, the ordinary least squares regression, weigheted least squares regression and generally least squares regression method and pooled data model have been used for estimating the research models.

Keywords

Consumption

Consumption based Capital Asset Pricing Model

Market β

Traditional Capital Asset Pricing Model