The CAPM and Risk-Return Anomalies in Asian Emerging Markets: Evidence from Bangladesh and Malaysia

The Capital Asset Pricing Model (CAPM) establishes a positive relationship between the risk and return of an asset, the risk being measured by beta, an asset’s return sensitivity to the market return. Inconsistencies/ deviations from the prediction of the CAPM are considered as market anomalies in finance literature. This paper investigates the market anomalies based on the risk-return relationship in Dhaka Stock Exchange (DSE) and Malaysian stock exchange Bursa Malaysia Berhad (BMB).The study finds that there exist significant share price anomalies in both the markets. Specifically, the results show that there are high (low) beta companies with low (high) returns which are clear deviations from the predictions of the CAPM in both the markets. The findings thus suggest that pricing of some individual companies may deviate from its long-term equilibrium price (i.e., mispricing) predicted by the standard single factor asset pricing model, the CAPM. These findings have important implications for stock brokers, fund managers, speculators, practitioners and general equity investors for investment decisions in that the investors, analysts and practitioners may be able to use the mispricing information to create profitable investment strategies in both the markets .