CAPM Beta and the UK Stock Returns

The study examines the relationship between systematic risk and returns of stocks listed on the London Stock Exchange. Using monthly stock data of 100 randomly selected stocks from January 1996 to December 2013 collected from DataStream 5.0, monthly closing values of the FTSE All Share Index as proxy for the market portfolio, yield on 3-month UK Treasury Bill rate as the risk-free interest rate, the study tests the explanatory power of CAPM Beta in explaining the variations in returns of stocks listed on the equity market. The empirical results from the Ordinary Least Square (OLS) cross-sectional regression analysis of the Capital Asset Pricing Model show that Beta the only explanatory variable in the model offered insignificant explanation to variations in stock returns over the entire sample period and for all the four sub-periods formed in the study, indicating that stock returns in the UK equity market are not significantly sensitive to the systematic (market) risk.