Statistical Modelling of the Capital Asset Pricing Model (CAPM)

Abstract

The purpose of this study is to derive a multiple linear regression model of the CAPM. More specifically, to test for other potential explanatory variables that can be added to the basic linear regression model for the expected returns on Apple Inc. The following explanatory variables were examined: share volume, outstanding shares, closing bid/ask spread, high/low spread and average spread. Using daily returns of Apple Inc. stock from 2007 till 2014 we were able to create a multiple linear regression model of CAPM that increase the R² value from the basic linear regression model and enhances the amount of variability in the returns on an asset. This is an important modification that can help better forecast returns on assets.

Keywords: CAPM; multiple linear regression model; average spread; variability in the returns