Predictive power of capital asset pricing model (CAPM), fama and frnch three-factor model (F & F) and the value at risk (VaR) in choosing the optimal portfolio shares

Abstract

If investment is just demarcated to specific assets, investment process may come cross considerable risk of losing the capital; but if an assortment of investments is organized in such a way to be the best possible set, investors, by minimizing the attendant risks, can approach the optimum rate of return that is close to the market value. In this study, Capital Assets Pricing Model (CAPM), Fama and French three factor model and Value-at-Risk (VaR) model and their forecasting capabilities are thoroughly analyzed. Investors are aptly informed to make a conscious decision in extracting the best portfolio set. The study sample consisted of 109 companies listed in Tehran Stock Exchange, on a monthly basis (96 months) during 2001-2008 and was selected. This study is based on assumptions that each model is efficient enough to forecast the arrangement of optimum portfolios. The regression test of out hypotheses indicates that CAPM model and Fama and French model are competent enough to forecast the structure of portfolios but VaR model's estimations must be cautiously applied. © EuroJournals Publishing, Inc. 2011.