Abstract:
Capital Asset Pricing Model (CAPM) is utilized to determine a theoretically suitable
required rate of return of an asset and values the asset's sensitivity to non-diversifiable
risk. This paper investigates the conditional relation between beta and returns in
individual stock returns between January 2011 and December 2019 on the stocks
listed in the Colombo Stock Exchange (CSE) using the approaches suggested by
Fama & MacBeth (1973) and Pettengill et al., (1995). The population of this research
includes all the companies listed in CSE and the top 50 stocks with a large market
capitalization have been selected as the sample.The unconditional test procedure
results show that there is no statistically significant risk-return relationship found in
any test period in individual stock returns. Thus, this result is similar to the previous
literature findings. The conditional tests results show that there is no significant
positive (negative) risk-return relationship in individual stock returns in CSE during
up (down) market months. But findings indicate a significant positive risk-return
relationship in individual stock returns in upmarket periods; whereas, a significant
inverse risk-return relationship is not provided in down market periods.
