To test CAPM model, the stock data between July 2005 and December 2008 from the Shanghai stock market is analyzed.
Select market index.
Practice shows that the Shanghai composite index, which can reflect the change of the overall market and development trend of the stock market more accurately, conforms to the market portfolio described by CAPM model. Another reason why we choose the Shanghai composite index is that so far the index has provided large amounts of data for market yield calculating.
Select risk-free interest rate
Because interest rate changes frequently from 2005 to 2008, the weighted average of 3 months deposit interest rates between 2005 and 2008 is chosen as risk-free interest rate.
Select the sampled stocks
40 stocks are chosen as sampled stocks from each of 40 kinds of industry listed in Shanghai stock market. The selection was made by using the method of random, too many weighted stocks which have obvious influence on the market can be avoid. And the selected stocks’ data are guaranteed to be continuous from July 2005 to December 2008.