Asian Social Science; Vol. 13, No. 3; 2017
ISSN 1911-2017 E-ISSN 1911-2025
Published by Canadian Center of Science and Education
126
The Gap between the Returns that Calculated by Capital Asset Pricing
Model and the Actual Returns in Abu Dhabi Securities Exchange
(ADX): Evidence from the United Arab Emirates
Anas Ali Al-Qudah1
1 Emirates College of Technology, BAF Dept, Abu Dhabi, UAE
Correspondence: Anas Ali Al-Qudah, Emirates College of Technology, BAF Dept, Abu Dhabi, UAE Millennium
Tower, Sheikh Hamdan Street, P. O. Box: 41009, Abu Dhabi, United Arab Emirates. E-mail:
[email protected]
Received: January 10, 2017 Accepted: January 19, 2017 Online Published: February 15, 2017
doi:10.5539/ass.v13n3p126 URL: http://dx.doi.org/10.5539/ass.v13n3p126 orcid.org/0000-0003-3609-1541
Abstract
This study aimed to compare the Historical Returns (Rit) in companies listed in Abu Dhabi Securities Exchange
(ADX) with the return which calculated by Capital Asset Pricing Model (E(Rit)) for the same companies and
periods, and trying to figure out the level of dispersion, distortions and differences between them, and trying to
figure out the strengths and weaknesses for the CAPM to explain the variances which happened in the Annual
Return.
The researcher used the time series analysis to achieve the target of this study, using Microsoft Office Excel
software to introduce some figure and graphs which considered as output from Scatter charts, which are often
used to find out if there’s a relationship between variable X and Y to make judgment on the gap between the
variables mentioned before.
The researcher found that in the most of the study sample firms the capital asset pricing model could not to
predict the returns were generated by companies in Abu Dhabi Securities Exchange (ADX), except in the
banking sector, the result was amazing because the graphs which output from the time series analysis show the
ability of CAPM to predict the Historical Returns, they were very closed and they Walking in the same direction
without volatility.
After the results appear in the time-series analysis researcher can says that there are weaknesses in the ability of
CAPM to predict the returns in the financial markets which consistent with the (Fama & French, 1992) and with
most studies conducted in this regard, but the model shows high ability to predict the returns in the banking
sector. Therefore, the researchers can generalization this result on the financial markets in the United Arab
Emirates.
Keywords: Abu Dhabi Securities Exchange (ADX), Capital Asset Pricing Model (CAPM), Expected Return
(E(Rit), Historical Returns (Rit), Risk (β).
JEL classification: G20, G21, G24, G30, G31
1. Introduction
The capital asset pricing model (CAPM) is a mathematical model which describes the hypothetical relationship
between risk and expected return for financial assets, especially stocks, it extensively used in finance
management field for the estimation of securities that include risk, therefore, this model takes into account the
risks involved on capital which used in the investment in securities. CAPM, introduced a theoretical
exemplification of the conduct of securities, it can be used in assess a firm’s cost of equity capital. In spite of
restriction, this model can be an advantageous supplement to several parties like financial managers, investors,
Prospective shareholders, Creditors and Potential lenders.
The charisma of the CAPM is that it offering strong satisfactory prognostications for how to measurement
involved risk and the relationship between the most important items in the finance field expected return and risk.
Unluckily, the experimental record in this model is inferior enough to decline the method it is used in
implementations. The CAPM’s experimental troubles might reflect theoretical weakness, because of many
ass.ccsenet.
simplify a
this model
The CAPM
choice of
suppose al
concern ab
the Marko
The CAPM
Jan Mossi
agreed on
market hav
and their i
cannot effe
rate, all tra
all investo
efficiency
available t
Many of e
demonstra
Through th
Abu Dhab
returns for
financial m
2. Literatu
A many L
estimation
methodica
2001) they
markets w
methodica
market (A
growing th
According
of variatio
risk was se
(Schwert,
over the bu
behavior, n
portfolios,
1992) in th
org
ssumptions, bu
.
constructs o
investors to ch
l investors are
out the (mean
witz model is
was introdu
n (1966) sepa
a number of a
e the same ta
nvestment are
ct in securitie
nsactions dev
rs have identic
especially th
imely to all in
Figure 1
xperimental t
te and explain
is idea, the re
i Securities E
the same firm
arket which i
re Review
iteratures hav
. (Fang & La
l skewness an
display that
ell. All Investo
l kurtosis. Th
rditti, 1971).
e magnitude o
to the (Ferson
n in the risk p
t to modify w
1989) impute
siness rotatio
ot only the i
if the CAPM
is paper they
t some of the
n the model of
oose portfoli
risk aversion
, variance) of
often called a
ced by Jack T
rately. In the
ssumptions, th
rget mainly is
widely diver
s prices, the p
oid of taxatio
al expectation
e strong form
vestors at the s
. Capital Asse
ests show ma
ed by the cap
searcher will
xchange (ADX
s & periods,
s classified as
e shown that
i, 1997) deriv
d methodical
the third and
rs are mostly
ey also keep
It also has be
f portfolios.
& Harvey, 1
remium is mo
ith market situ
d differential
n. (Friend and
ndividual secu
demonstrates
discuss the re
Asian
se reasons ma
portfolio sele
o at period t-1
and, when the
their (t) perio
(mean-varianc
reynor (1961
regarding of
e most impor
to maximize
sified, in add
rocesses of le
n costs, all se
s, and the las
efficiency m
ame degree o
t Pricing Mod
rket distortion
ital asset prici
try in this stud
), by compa
to find out th
an emerging m
non varied s
ed a four-mo
kurtosis enga
fourth mom
recompensed
the expected
en document
991) study of
re significant
ation and bus
risk premium
Blume, 1970
rities. Expect
securities retu
lationship bet
Social Science
127
ybe also appe
ct progressed
that generate
y have many
d investment
e) model.
, 1962), Willia
the CAPM’s
tant of these a
wealth, and th
ition that all
nd and borrow
curities are co
t assumption f
arket where
f accuracy.
el & the relatio
s like the eff
ng model.(Fam
y to figure ou
ring the return
e extent of th
arket.
kewness and
ment CAPM
ge to the risk
ents explain
for taking risk
returns E(Rit)
ed that skewn
US bond and
than the chang
iness cycles.
between up a
) and (Black,
ed returns an
rns it can de
ween beta and
ar by difficult
by Harry Mar
s a random re
choices to sel
return, especi
m F. Sharpe
assumptions
ssumptions th
e investors ra
investors are p
will be done
mpletely capa
or this model
this model a
nship betwee
ect of size an
a & French,
t the possibilit
s calculated b
e differences
kurtosis show
and it was s
premium of s
the return-pro
as assessing
for taking th
ess and kurto
stocks returns
es in the beta
nd down mar
Jensen and Sc
d market beta
monstrates po
expected retu
ies in achieve
kowitz (1959)
turn at t. The
ect between p
ally for one ti
(1964), John L
, the scholars
at all participa
tional in addi
rice takers w
under the inte
ble of being
perfectly link
ssumes that a
n Risk & Retu
d value of fir
1992) in the t
y of predictin
y the CAPM
and distortion
s a significa
hown that me
ecurities. (Ch
ducing proce
by high metho
e profit of a
sis cannot be
, they discove
s. That’s why
kets to varyin
holes, 1972) s
s collect in th
rtfolio returns
rn may be ev
Vol. 13, No. 3;
ment valid tes
. In this mode
Markowitz m
ortfolios, they
me investmen
intner (1965)
mentioned b
nts in the fina
tion to risk-av
hich is mean
rest equal risk
divided and li
ed with the m
ll information
rn.
ms that canno
hree-factor m
g the returns i
and the histo
s that occur in
nt role in sec
thodical vari
ristie & Chau
ss in the fina
dical variance
positively ske
various awa
red that the ti
equity premiu
g methodical
tudy the portf
e same metho
. (Fama & Fre
en adulate tha
2017
ts of
l, the
odel
only
t, so,
and
efore
ncial
erse,
they
free
quid,
arket
are
t be
odel.
n the
rical
this
urity
ance,
dhry,
ncial
and
wed
y by
ming
m of
risk
olios
d in
nch,
n the
ass.ccsenet.
one report
and French
3. The stu
This study
with the r
trying to fi
strengths a
local level
calculated
4. The Stu
Figure 2 b
main varia
by CAPM
From the
Return) an
listed in th
5. The Pop
5.1 The Stu
The Popul
established
5.2 The Stu
The Samp
exchange.
companies
random sa
Table 1. Th

1
2
3
4
5
6
7
8
Source: m
6. The Stu
The resear
way for th
6.1 The fir
org
ed by the earl
, 2004) that th
dy objective
aims to comp
eturn calculat
gure out the l
nd weaknesse
, this study is
by CAPM.
dy Model
elow shows th
ble of this stu
, for the same
Fi
Figure 2 abov
d (E(Rit): the
e ADX.
ulation & Sa
dy Population
ation of this st
in November
dy Sample
le of this stud
There are man
in this finan
mple from the
e Study Samp
Servic
Insuran
Servic
Insuran
Industr
Consumer
Bank
Bank
ade by researc
dy Method
cher used the
is type of rese
st step: Colle
y experimenta
e reported eff
are the histor
ed by Capital
evel of dispers
s for the CAP
the first attem
e virtual mod
dy the 1st one
companies and
gure 2. The vi
e, it’s clear th
Return calcu
mple of the S
udy is the com
15, 2000 for
y includes ra
y sectors in th
cial market co
a whole comp
le
es
ce
es
ce
ial
Staples
s
s
her
time series an
arch, below th
ct the historic
Asian
l literature. T
ects sound to
ical returns in
Asset Pricing
ion, distortion
M to explain
pt to discuss
el for this stu
is the historic
the same per
rtual model of
at this study l
lated by CAP
tudy
panies listed
trading shares
ndom compa
e Abu Dhabi
mpared to ot
anies listed in
ADAVIAT
ABNIC
ADNH
ADNIC
ADSB
AGTHI
ADCB
ADIB
alysis to achi
e steps that the
al return from
Social Science
128
hat idea was h
lack a theoreti
companies lis
Model for th
s and differen
the variances
the differenc
dy to achieve
al return (Act
iods:
the study, Sou
ooking for m
M) for the sa
in Abu Dhabi
and bonds of
nies taken fro
Securities Ex
her markets, s
(ADX). The
ION
A
eve the target
researcher go
the secondar
owever defy
cal base.
ted in Abu Dh
e same comp
ces between t
which happen
es between th
the object of
ual return), an
rce: made by
ake compariso
mple will tak
Securities exc
local and fore
m listed com
change (ADX
o the research
table1 below i
Ab
Al Bu
Abu
Abu Dh
Abu D
AG
Abu D
Ab
of this study;
es through it
y resources of
in 1995 by K
abi Securities
anies and the
hem, and tryin
ed in the Ann
e historical re
this research,
d the 2nd is th
researcher
n between th
e randomly fr
hange, this fin
ign companies
panies in Abu
), But it consid
er takes appr
ncludes the stu
u Dhabi Aviatio
haira National I
Dhabi National
abi National Ins
habi Ship Build
THIA GROUP
habi Commerc
u Dhabi Islamic
he found it th
in the next sec
data, which p
Vol. 13, No. 3;
othari et al. (F
Exchange (A
same period
g to figure ou
ual Return. A
turns & the r
which explain
e return calcu
e (Rit: The A
om the comp
ancial market
.
Dhabi Secu
er a small nu
oximately 48
dy sample:
n Co.
nsurance
Hotels
urance Co.
ing PJSC
PJSC
ial Bank
Bank
e most approp
tions:
ublished from
2017
ama
DX)
, and
t the
t the
eturn
two
lated
ctual
anies
was
rities
mber
% as
riate
the
ass.ccsenet.org Asian Social Science Vol. 13, No. 3; 2017
129
Abu Dhabi Security Exchange (ADX), these monthly data collected for the study sample that includes eight
companies listed in ADX for the period (2008-2015).
6.2 The second step: calculate the Annual return from the monthly return that collected in the first step, for the
study sample using the Holding Period Return (HPR).
6.3 The third step: calculate the Beta (systematic Risk) for the companies in the study sample, for the same
period above, using the covariance of the return of an asset and the return of the industry index divided by the
variance of the return of the industry index over a study period.
6.4 The fourth step: getting the risk free rate (Rf) from the Central Bank in Abu Dhabi for the years including in
this study (2008-2015), it equals the Interest Rate for the Treasury Bills that issued from the CB in Abu Dhabi.
6.5 The fifth step: getting the industry index for each sector used in this study as shown in Table (1) from the
ADX for the years including in sample (2008-2015).
6.6 The sixth step: calculate the E(Rit) Expected Return for each company in the study sample using the CAPM.
Because the Variables that need to use CAPM equation become existed in the previous steps
6.7 The seventh step: the researcher will use the output in the previous steps especially the Historical Return (Rit)
and the Expected Return E(Rit) to achieve the time series analysis, by insert the output these information to the
Microsoft Office Excel software, and from the result of the Graphics which produced by Excel software then the
researcher can make the comparison between the variables above.
7. The Study Variables
The variables of this study as following:
7.1 The Historical Return: the returns which actually earned by investors in the study period, in this regard the
researcher used the HPR equation to calculate this variable:

ܲሺݐሻ െ ܲሺ ݐെ 1ሻ
Whereas,
Rit: return on acquisition period representing return on stock
P (t): stock price at the end of year
P (t-1): stock price at the beginning year
7.2 The Systematic Risk (Beta): to calculate the Beta for the companies in the study sample the researcher used
the covariance equation as following:

, ܴ݉ሻݐܴ݅݅ܽ݊ܿ݁ ሺݎܽݒ݋ܥ
Whereas,
β: Systematic Risk
Covariance (Rit, Rm): the covariance of the return of an asset and the return of the industry index
Variance of Market: the variance of the return of the industry index
7.3 The Expected Return: after the researcher get the Beta (β), Risk free rate (Rf) and the industry index (Rm), he
used the CAPM to calculate the Expected Return for the study period for all companies in the study sample as
following:
ܧሺܴ ݅ݐሻ ൌ ܴ݂ ൅ ∗ ߚሺܴ݉ െ ܴ݂ ሻ ൅ é ሺ3ሻ
Where,
E(Rit): Expected Return for the Company (i), Period (t)
Rf: Risk free rate
Rm: industry index
é∶ Random Error
ass.ccsenet.
8. Discuss
After using
Return cal
researcher
between th
study samp
8.1 The 1s
Figu
ADAVIAT
the Servic
between th
relationshi
which are
Given the
2008 to 20
very high a
This case
exceed the
significant
8.2 The 2n
F
ABNIC: th
Insurance
periods the
(Rit) and E
org
ion the Resul
the Software
culated by CA
divide results
e actual value
le:
t Company: A
re 3. Scatter ch
ION: this Sy
es sector, after
em using Ex
p between va
governed by T
figure above r
12 and the se
nd the Histor
shows the we
(Rit) but the
. Which mean
d company: A
igure 4. Scatt
is Symbol ind
sector, given
first from 20
(Rit) it was v
ts
Excel to draw
PM in the sam
discussion to
s of return and
DAVIATION
art output fro
mbol indicate
calculate the
cel software
riable X and Y
IME SERIES
esearcher fou
cond from 20
ical Return (R
akness of CA
y were very c
s the CAPM w
BNIC
er chart outpu
icates to the A
the figure ab
08 to 2013 an
ery high and t
Asian
the disparity
e market for
be each com
the values ca
m Microsoft O
s to the Abu D
E(Rit) using
especially Sc
to make jud
.
nd that the tim
12 to 2015. In
it) exceed the
PM to predict
losed to each
as able to pre
t from Micros
l Buhaira Na
ove researche
d the second
he Expected R
Social Science
130
between the H
the same com
pany separate
lculated for th
ffice Excel so
habi Aviation
CAPM and ca
atter charts w
gment on the
e series can b
the first perio
Expected Retu
the return in
, the researche
dict the return
oft Office Exc
tional Insuran
r found that t
from 2013 to
eturn E(Rit)
istorical Retu
panies which
ly, the followi
e return using
ftware for the
Co. it is one
lculate (Rit) u
hich are ofte
gap between
e divided into
d the gap bet
rn E(Rit).
the ADX, but
r can say in t
s in period of
el software fo
ce it is one of
he time serie
2015. In the
exceed Histor
rn in the ADX
include in the
ng figures sho
CAPM for ea
ADAVIATIO
of the Abu D
sing HPR and
n used to fin
the variables
two main pe
ween the (Rit
in the second
he second per
(2012-2015).
r the ABNIC C
the Abu Dhab
s can be divid
first period th
ical Return (R
Vol. 13, No. 3;
and the Expe
study sample
w the Differe
ch company i
N Company
habi compani
make compa
d out if ther
mentioned b
riods the first
) and E(Rit) it
period the E
iod the gap in
ompany
i companies i
ed into two
e gap betwee
it) this case sh
2017
cted
, the
nces
n the
es in
rison
e’s a
efore
from
was
(Rit)
not
n the
main
n the
ows
ass.ccsenet.
the weakn
shows the
series (200
8.3 The 3r
F
ADNH: th
Services se
the first fr
E(Rit) it w
weakness
also shows
series (200
but in the
these two y
8.4 The 4th
F
ADNIC: th
the Insuran
periods the
(Rit) and E
CAPM to
differences
period of (
org
ess of CAPM
weakness of
8-2015).
d company: AD
igure 5. Scatt
is Symbol ind
ctor, given th
om 2009 to 20
as very high
of CAPM to p
the weaknes
8-2015). It is
time series an
ears.
company: AD
igure 6. Scatte
is Symbol ind
ce sector, giv
first from 20
(Rit) it was
predict the re
but they go
2010-2015).
to predict the
CAPM too. T
NH
er chart outpu
icates to the
e figure above
12 and the se
and the Histo
redict the retu
s of CAPM. T
good to say th
alysis it is no
NIC
r chart output
icates to the A
en the figure
08 to 2010 an
very high and
turn in the A
hand in the sa
Asian
return in the A
hat means the
t from Micros
Abu Dhabi N
researcher fo
cond from 20
rical Return (
rn in the ADX
hat means the
at the (Rit) an
t considered a
from Microso
bu Dhabi Na
above researc
d the second
there was ve
DX, but in th
me direction.
Social Science
131
DX, but in th
CAPM wasn
oft Office Exc
ational Hotels
und that the tim
13 to 2015. In
Rit) exceed th
, and in the se
CAPM wasn
d E(Rit) were
one period st
ft Office Exce
tional Insuran
her found tha
from 2010 to
ry volatility i
e second peri
Which means
e second perio
’t able to pred
el software fo
it is one of t
e series can
the first perio
e Expected R
cond period th
’t able to pred
very closed in
atistically sign
l software for
ce Co. it is on
t the time seri
2015. In the
n the result, t
od they were
the CAPM w
d the (Rit) ex
ict the return
r the ADNH C
he Abu Dhab
be divided into
d the gap bet
eturn E(Rit) t
e (Rit) exceed
ict the return
the (2008-20
ificant, so the
the ADNIC C
e of the Abu D
es can be divi
first period th
his case show
very closed t
as able to pre
Vol. 13, No. 3;
ceed E(Rit), w
s in period of
ompany
i companies in
two main pe
ween the (Rit
his case show
E(Rit) too, w
s in period of
09) & (2012-2
researcher ig
ompany
habi compani
ded into two
e gap betwee
s the weakne
o each with s
dict the retur
2017
hich
time
the
riods
) and
s the
hich
time
013)
nore
es in
main
n the
ss of
ome
ns in
ass.ccsenet.
8.5 The 5th
ADSB: thi
Industrial
periods the
(Rit) and E
shows the
(Rit) but t
Which me
appears th
8.6 The 6th
F
AGTHIA
Consumer
make com
exceed the
a whole pe
org
company: AD
Figure 7. Scat
s Symbol indi
sector, given
first from 20
(Rit) it was v
weakness of C
hey were very
ans the CAPM
at there is noti
company: A
igure 8. Scatte
: this Symbol
Staples sector
parison betwe
Expected Ret
riod of study.
SB
ter chart outpu
cates to the A
the figure ab
09 to 2012 an
ery high and
APM to pred
closed to eac
was able to p
ceable result i
GTHIA
r chart output
indicates to th
, given the fig
en the (Rit)
urn E(Rit), th
Asian
t from Micros
bu Dhabi Ship
ove researche
d the second
the Historica
ict the return
h, the researc
redict the retu
n the years (20
from Microso
e AGTHIA G
ure above res
and E(Rit) it
is case shows
Social Science
132
oft Office Exc
Building PJS
r found that t
from 2012 to
l Return (Rit)
in the ADX,
her can say in
rns in period
14-2015) it al
ft Office Exce
ROUP PJSC
earcher found
was very hig
the weakness
el software fo
C. It is one of
he time serie
2015. In the
exceed the E
but in the seco
the second p
of (2012-2015
most equal in
l software for
. It is one of t
that the time
h gap and the
of CAPM to p
r the ADSB C
the Abu Dhab
s can be divid
first period th
xpected Retur
nd period the
eriod the gap
). From the sa
returns.
the AGTHIA
he Abu Dhab
series from 2
Historical R
redict the retu
Vol. 13, No. 3;
ompany
i companies i
ed into two
e gap betwee
n E(Rit), this
E(Rit) excee
in not signifi
me figure abo
Company
i companies in
008 to 2015, w
eturn (Rit) al
rn in the ADX
2017
n the
main
n the
case
d the
cant.
ve it
the
hen
most
for
ass.ccsenet.
8.7 The 7th
F
ADCB: th
bank secto
compariso
Expected R
period of s
8.8 The 8th
F
ADIB: thi
sector; it is
the time se
and the Ex
predict the
direction w
9. Conclus
This study
with differ
includes m
analysis th
companies
CAPM to
Reference
Arditti, F
doi:10
org
company: AD
igure 9. Scatte
is Symbol ind
r, given the
n between the
eturn E(Rit),
tudy. Actually
company: AD
igure 10. Scatt
s Symbol indi
interesting re
ries from 200
pected Return
return in the
ithout having
ion
is the first of
ences betwee
any sectors:
at showed th
in Abu Dhab
predict the His
s
. (1967). R
.1111/j.1540-
CB
r chart output
icates to the A
figure above
(Rit) and E(R
this case show
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