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University of Sydney Faculty of Economics and Business EMCT3020 - APPLIED ECONOMETRICS Project Empirical tests on the CAPM 1. Introduction: Despite the appeal of the Capital Asset Pricing Model (CAPM), there have been many disputes on whether it is a good measure of the relationship between returns and risks. Since it was first developed by Sharp(1964), researchers have carried out a huge number of both theoretical and empirical tests on the original model as well as its newly developed versions. Although this has substantially improved the view on the CAPM, there are still non-trivial problems in the practical implementation of the model. This paper examines the validity of the CAPM on Australian data. Statistical tests will be carried out; alternative forms including international and externality-associated versions will be suggested and examined. We focus on four questions. First, we investigate the explanatory power of betas for nine different Australian industries' stock returns. Second, we ask whether the externality-associated...

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