Abstract:

The aim of the study is to verify the pricing of assets on the London Stock Exchange using CAPM and D-CAPM. In this study the risk-return relationships were estimated using realised returns in cross-sectional regressions. In CAPM relations the risk was considered in a classical and downside risk framework. For calculating the downside risk the three formulas Harlow and Rao, Bawa and Lindenberg and Estrada were used. The subject of the research were stocks from the FTSE 100 index and equally-weighted portfolios based on these stocks. The cross-sectional models give an evidence of existing risk premium associated with Sharpe beta and downside beta confirming both CAPM and D-CAPM. The downside risk premiums were significantly higher than the Sharpe beta premiums except for the results obtained with the Bawa-Lindenberg beta coefficient.