Testing the Capital Asset Pricing Model (CAPM) on the Uganda Stock Exchange

Abstract: This paper examines the validity of the Capital Asset Pricing Model (CAPM) on the Ugandan stock market using monthly stock returns from 10 of the 11 companies listed on the Uganda Stock Exchange (USE), for the period 1st March 2007 to 10th November 2009. Due to the absence of readily available Uganda Stock Exchange(USE) data, and the placement of daily price lists in pdf only, on the USE website: http://www.use.or.ug, the article also discusses the procedures taken to mine the data needed. The securities were all put in one portfolio in order to diversify away the firm-specific part of returns thereby enhancing the precision of the beta estimates. This paper should be of interest to both Ugandan and non-Ugandan investors and market researchers. While many developing countries have legal restrictions against foreign participation in capital and money markets, this is not so in Uganda, where it has become part of government policy to encourage foreign capital in flow, inorder to stimulate the development of the small and underdeveloped markets. The Black, Jensen, and Scholes (1972) CAPM version is examined in this article. This version predicts a non zero-beta rate, along with the relation of higher returns to higher risk. The estimated zero-beta rate obtained is not statistically different from zero, and the estimated portfolio beta coefficient is statistically significant, providing evidence that the traditional form of CAPM holds on the USE, albeit having a beta coefficient that is not good at explaining the relationship between risk and return.