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The Capital Assets Pricing Model & Arbitrage Pricing Theory: Properties and Applications in Jordan

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  • Ibrahim Alshomaly
  • Ra’ed Masa’deh

Abstract

This paper aimed to test the validity of capital asset pricing model (CAPM) and arbitrage pricing theory (APT) in Jordanian stock Market using three different firms of three main sectors, financial, industrial, and service sector for the period Q1 (2000) to Q4 (2016), using published information obtained from Amman stock exchange (ASE), these models were designed to measure the cost of capital using the coefficient of systematic risk factor, that used in the valuation of capital assets. We reviewed the most important similarities and differences between the two models out of sectors analysis. The study showed, first, there are some differences between the two models in term of the amount of systematic risk that can be eliminated by diversification in the three sectors. Second, the application of APT model showed that large percentage of risk can be eliminated by diversification more than CAPM model. Third, the banking sector in Jordan faces more systematic risks than other sectors.

Suggested Citation

  • Ibrahim Alshomaly & Ra’ed Masa’deh, 2018. "The Capital Assets Pricing Model & Arbitrage Pricing Theory: Properties and Applications in Jordan," Modern Applied Science, Canadian Center of Science and Education, vol. 12(11), pages 330-330, November.
    • Handle: RePEc:ibn:masjnl:v:12:y:2018:i:11:p:330
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    References listed on IDEAS

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    1. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    2. Roll, Richard & Ross, Stephen A, 1980. "An Empirical Investigation of the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 35(5), pages 1073-1103, December.
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    4. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    5. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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