An Empirical Analysis of CAPM and Fama-French Three-Factor Model -- Based on the Example of Shanghai Stock Exchange

Some scholars, represented by William F. Sharpe and John Lintner, have established the "Capital Asset Pricing Model" (CAPM) in the 1960s. This model finds that under certain assumptions the expected rate of return shows a clear linear relationship with market risk (systemic risk), no matter for a single asset or a combined asset. Capital Asset Pricing Model (CAPM), is regarded as the spine of modern price theory in financial market. It has been applied widely to asset pricing analysis and determination, such as stocks, funds and bonds and to investment decision field. This essay based on CSMAR data, separately uses CAPM and the Fama-French Three-Factor Model to conduct empirical test on the expected return of SSE A-share portfolio. The main conclusion is that in China’s stock market, market risk is not the only factor which determines the expected return of the market portfolio or individual stock, while the size factor (SMB) and book-to-market ratio factor (HML) can better explain the portfolio’s expected rate of return.