Test Of Capital Asset Pricing Model; Jakarta Stock Exchange, Year 2005

Abstract

There were so many discussions about CAPM, especially about the effectiveness of this model to predict expected return. This research explored the applicability of using CAPM to predict expected return in public firm in Indonesia. In short, the return of investment was examined to investigate the effectiveness of CAPM in predicting the expected return. This research was hypothesis-testing research. There was a hypothesis tested in this research. The hypothesis stated that expected return predicted using CAPM have no significant difference to actual return. The data collected were secondary data obtained from literature and documentation. The population used in this research were all companies' share listed in Jakarta Stock Exchange (JSX) traded in the year 2005, and the sample taken were LQ 45 companies listed at the Jakarta Stock Exchange in the period of 2005 using purposive sampling. The findings of this research indicated that it is not applicable to use CAPM to predict the expected return in public finn in Indonesia. CAPM which is predicted using the regression analysis to find beta could not predict the expected return accurately among stocks. The t-test also shows that the use of CAPM in public firm in Indonesia is not effective. The value of predicted value of return (expected rate of return) both in weekly development and in stocks comparison show any bias from the actual rate of return. The t-test result shows that there is significant difference of actual return and expected return predicted using the CAPM. CAPM can not p.-cdict the rate of the return effectively using the actual return, risk free rate return, and market return. All of these data can not accurately give infonnation to the result of expected return obtained using the CAPM.