Beta and Returns Revisited - Evidence from the German Stock Market

Traditional tests of the CAPM following the Fama / MacBeth (1973) procedure are tests of thejoint hypotheses that there is a relationship between beta and realized return and that the marketrisk premium is positive. The conditional test procedure developed by Pettengill / Sundaram/ Mathur (1995) allows to independently test the hypothesis of a relation between beta andrealized returns. Monte Carlo simulations show that the conditional test reliably identifies thisrelation. In an empirical examination for the German stock market we find a significant relationbetween beta and return. Previous studies failed to identify this relationship probably becausethe average market risk premium in the sample period was close to zero. Our resultsprovide a justification for the use of betas estimated from historical return data by portfoliomanagers. [Ralf Elsas, Mahmoud El-Shaer, Erik Theissen]<p>The ISSN-No. corresponds to the following working paper series: Johann Wolfgang Goethe-Universität Frankfurt am Main - Fachbereich Wirtschaftswissenschaften - Working Paper Series: Finance & Accounting.