The document presents a review of the journal article 'The Capital Asset Pricing Model: Theory and Practice' by Fama and French, focusing on the CAPM's shortcomings and exploring alternative factors for stock return explanations. It summarizes findings from various studies both within and outside Kenya, highlighting consistent results and research gaps. Additionally, it suggests areas for future research and practical applications of the CAPM in finance.

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BY : GABRIEL G. KIMANI, REG: HDB424-C004-0460/2024
&
PETER O. OCHOKOLO, REG: HDB424-C008-1426/2024
SUPERVISOR : DR. TOBIAS OLWENY
Journal Article Review
“THE CAPITAL ASSET PRICING MODEL :
THEORY AND REVIEW” (FAMA AND FRENCH)
JUNE 2024
PHD - FINANCE
JOMO KENYATTA UNIVERSITY OF AGRICULTURE &
TECHNOLOGY
GROUP 2

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1.0 Introduction
 This presentation contains review findings of the Financial
Journal Article ““The Capital Asset Pricing Model: Theory
and Practice” by Eugene F. Fama and Kenneth R. French.
 The authors study the shortcomings of the Capital Asset
Pricing Model (CAPM) and explore alternative factors that
could better explain expected stock returns.
 Summary findings of related authors both within and outside
Kenya has also been presented for comparison purposes.

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2.0 Review Contents
Journal Article Review Contents

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2.1 Authors’ Motivation, Key Issues, Methodology and
Findings

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2.1 Authors’ Motivation, Methodology and Findings..
Summary Findings

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2.1 Authors’ Motivation, Methodology and Findings..
Summary Findings…

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2.2 Key Issues Raised by the Authors

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2.2 Key Issues Raised by the Authors…

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2.3 CAPM Studies within Kenya
 The studies undertaken in Kenya on CAPM provide an overview of
the motivations, contributions, methodologies, and findings of each
study, highlighting the challenges and limitations of applying
CAPM in the Kenyan market.
 The results of these studies are fairly consistent with sentiments
contained in Fama and French study “The Capital Asset Pricing
Model: Theory and Practice”. They do not only suffer from
limitations but also provide research gaps for further exploration.

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2.3 CAPM Researchers within Kenya..
 Maina F.W. (2019) “Testing the Capital Asset Pricing Model on Stocks
Quoted at the Nairobi Securities Exchange”
 Wainaina J.K. (2014) “The Validity of Capital Asset Pricing Model in
Predicting Stock Returns in the Nairobi Securities Exchange”
 Mwangi A.M., etal (2012). “Empirical Testing of Capital Asset Pricing
Model among Listed Securities in Nairobi Stock Exchange”
 Kinyua, F.K. (2015). “The Applicability of the Capital Asset Pricing
Model (CAPM) at the Nairobi Securities Exchange”
 Ochanda, J.K. (2018) “The Performance of Capital Asset Pricing Model
in the Nairobi Securities Exchange

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2.3 CAPM Studies Outside Kenya
 Studies on the Capital Asset Pricing Model (CAPM) have been
extensively conducted in various global contexts beyond Kenya.
 These studies often aim to test the validity, applicability, and
robustness of CAPM in different markets and economic environments.
 The studies collectively represent significant contributions to the
understanding and critique of CAPM, offering insights into its
applicability, limitations, and the evolution of asset pricing models.
 They collaborate the observation from Fama and French work that
there are research gaps calling for further research on CAPM.

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2.3 CAPM Researchers Outside Kenya..
 Sharpe, W.F.(1964) “Capital Asset Prices: A Theory of
Market Equilibrium under Conditions of Risk”
 Lintner’s (1965) “The Valuation of Risk Assets and the
Selection of Risky Investments in Stock Portfolios and
Capital Budgets”
 Black and Scholes (1972) “The relationship between average
returns and beta while controlling for non-systematic risk”
 Jagannathan and Wang (1966) “Limitations of the traditional
CAPM”.

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2.4 Theoretical Development on CAPM Model by the
Authors

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2.4 Theoretical Development on CAPM Model by the
Authors …

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2.5 Critique

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2.6 Contribution to Finance Theory

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2.6 Contribution to Finance Theory…

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2.7 Research Gaps

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2.7 Research Gaps ….

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2.8 Way Forward
 Future studies could offer a more comprehensive and up-to-date
analysis of the topic and in particular help addressing empirical
failing of CAPM model and mitigate differences generated by the
model compared to real-world data.
 Research should be undertaken to develop further a CAPM model
that need not rely on too many assumptions, a more complex model
to take care of additional multi-factors and market dynamics.
 Further investigations should be done to establish how CAPM model
can be improved to explain factors that cause asset mispricing
anomalies.

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2.9 Practical Application
 There are a number of local context practical applications
demonstrating the relevance of the CAPM in various financial
contexts including:
i. Cost of Capital Estimation;
ii. Portfolio Performance Evaluation; and,
iii. Basis for Evolution of Asset Pricing Model.

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Any Questions?
Then…
END OF session
NB: References are as contained in the MS-Word Doc