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THE CONDITIONAL RELATION BETWEEN BETA AND RETURNS: EVIDENCE FROM SRI LANKA

Abstract

This paper examines the conditional beta-return relation on the stocks listed in the Colombo Stock Exchange by using the cross-sectional regression test. There is no evidence of a positive risk premium on beta when the unconditional relationship between beta and return is considered. However, when the market is split on the market excess returns, there is a significant positive (negative) relationship between beta and returns in up (down) markets for individual and portfolio of stocks. Therefore, we cannot reject the usability of beta in explaining stock returns in Sri Lanka. Beta has a significant relationship with stock returns subject to the condition of the market. Thus, our fi ndings are new and could be useful for making investment decisions.

Keywords: Return, The CAPM, Beta, Conditional relationship

For full paper: fmscresearch@sjp.ac.lk


Author Biography

P.A.N.S Anuradha

Senior Lecturer, Department of Finance Faculty of Management Studies & Commerce University of Sri Jayewardenepura Nugegoda