Abstract

International tests of the suitability of the Capital Asset Pricing Model (CAPM) found that the minimum return required by investors implied by the model exceeded the risk-free proxy yield. In contrast, similar tests in South Africa found that the minimum required return was not significantly different from the risk-free proxy return. This study sought to resolve this apparent anomaly by employing direct and indirect approaches to estimate the minimum return required by investors. It found that, in keeping with international evidence, the minimum required rate of return exceeded that of the risk-free rate proxy; whilst the minimum-variance zero-beta portfolio return closely approximated the minimum required return. The implications of these findings for researchers and practitioners using the CAPM are discussed.

Key words: Capital Asset Pricing Model, zero-beta portfolio, risk-free rate, required rate of return.