Adam Karp Gary van Vuuren


This paper tests the validity and accuracy of the Capital Asset Pricing Model and the Fama-French Three-Factor Model, by predicting the variation in excess portfolio returns on the Johannesburg Stock Exchange. Portfolios of stocks were constructed based on an adapted Fama-French (1993) approach, using a  annual sorting procedure, based on Size and Book-to-Market metrics respectively. The sample period spans six years, 2010 to 2015, and includes 46 companies listed on the JSE. The results indicate that both models perform relatively poorly because of inadequate market proxy measures, market liquidity restrictions, unpriced risk factors and volatility inherent in an emerging market environment. The Value Premium is found to explain a larger proportion of variation in excess returns than the Size Premium, and is more pronounced in portfolios with relatively higher book-to-market portfolios.