Management Dynamics

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The selection of a proxy for market portfolio in CAPM model remains one of the most crucial steps in its empirical use. This paper aims to check the validity of CAPM in Indian market and to identify the most efficient proxy for market portfolio. Incorrect selection of this proxy may lead to inaccurate result and even rejection of CAPM model when tested empirically. This further emphasises the importance of selecting the correct proxy for market portfolio. The paper reviews why standard cap-weighted indices can be used as the proxy and then which ofsuch index is the most efficient proxy for the Indian market. A sample of 100 companies and has been taken to study the efficiency of four broad index namely BSE SENSEX, BSE 100, BSE 200, BSE 500 as proxy for market portfolio. The result shows that BSE 500 is a better index to be used as proxy for the market portfolio, instead of the most popular BSE Sensex, which is widely used for these kinds of studies.
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