Real estate volatility tests
There has been research carried out on the risk and returns of real estate investments trusts (REIT). This study was done by Najand and Fitzgerald (2006, p.174) who studied the volatility and return for REITs between 1995 and 2003 with daily data where they found that they had an average beta of 0.24 and an abnormal return 2.25%. A study done by Chaudhry, Myer and Webb (1999, p.342) on real estate stocks, in the United States between the period 1978 and 1996, revealed that common stocks had an inverse long-run relationship with real estate stocks. This study can be compared to other results concluded from the studies on common stock. Another study done by Ennis and Burik (1991, p.24) between the years 1980 and 1989 on U.S real estate stocks deduced that real estate stocks generally have a low correlation or beta to market index and that it can be both positive and negative. Nevertheless, there are no accessible research which is very new or recent about the movements of real estate stocks and their performance when compared to the market especially when it comes to the real estate markets in china. The housing prices in the Chinese real estate has grown so much over the last decade which has led to escalating prices in the market and with the correlation between the real estate prices and the rate of volatility makes this research very plausible.
3.5.4 Tests of CAPM
Many tests have been done to evaluate whether or not the tests for CAPM are accurate or not.
A consequence of the popularity and the impact the Capital Asset Pricing Model had on financial asset valuation, there are a lot of research and tests done on whether or not the model is accurate.
Black, Jensen and Schole conducted an empirical test on the CAPM and its security market line between the years 1926 and 1965. They made a regression analysis and used the New York stock exchange as a weighted market index. They estimated beta values for all the listed stocks on NYSE to calculate the expected return. They calculated the SML slope to be 12.972% with high significance, which was considered to be the risk free rate of return or the return for a portfolio with beta of zero. This provided support for the CAPM and the approach for beta as the only predictor for differences in expected return (Haugen, 1999, p.238-239).
Basu (1977) however, divided stocks on the basis of earnings-stock ratios and found that the CAPM underestimated the high earnings to price stocks while it overestimated the low earnings to price stocks. Bhandari (1988) found that stocks with high debt-equity ratios systematically are underestimated compared to their market betas presented by the CAPM.
Fama & French (2004, p.36) confirms that “Ratios involving stock prices have information about expected returns missed by market betas”. The issue of evaluating a model that are based on assumptions that need to be...