Is the Capital Asset Pricing Model valid in the Indian context ?

CAPM has been a great milestone in asset pricing theory, explaining the risk-return characteristic of financial assets. However, over a few decades the validity of CAPM has been put to test by a large number of researchers. In this study, we test the validity of CAPM in India on the stocks listed on the National Stock Exchange by using Fama and McBeth (1973) two step procedure. Our results show absence of any significant relationship between betas and risk premiums and therefore we conclude that CAPM is not a valid test in explaining the risk-return characteristics of assets listed on the National Stock Exchange over the sample period. Keywords: CAPM, beta, NSE, premium, two step procedure.