The aim of this paper is to examine whether the Capital Asset Pricing Model (CAPM) is able to explain the stock returns in the Mauritian stock market. The sample in the present study consists of all securities listed on the official market of the Stock Exchange of Mauritius (SEM). Using data from 1998 to 2007, the study provides minor support for the three-moment CAPM, with no significant support for either the two-moment or the four-moment CAPM in the case of SEM.

The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) has been one of the most extensively used models for the estimation of expected return or cost of equity for individual stocks for decades now. As a major tool for security analysis, the CAPM attempts to explain the relationship between risk and reward.

The CAPM theory forecasts that the expected return on an asset bears a linear relationship with the asset covariance with the return on the market portfolio. Essentially, the standard model is based on the fact that higher returns should be necessarily associated with higher beta risks. However, empirical evidence has failed to sustain this relationship due to the inadequacy of the market beta alone to explain the variations in stock returns and the unrealistic assumptions of the model.

Further criticisms of the classic mean-variance model of the CAPM have instigated researchers to study moments of higher order than the variance of asset returns. The assumption of a quadratic utility function for an investor has been discarded to give way to a more logical approach which indicates that risk aversion decreases with increase in wealth. Moreover, Galagedera (2004) relates that returns do not always follow a normal distribution, thereby violating the assumption of normality of CAPM.

Financial Economics Journal, Capital Asset Pricing Model, Market Portfolio, Emerging Markets, Security Market Line, Multifactor Asset Pricing Models, Nonparametric Models, New York Stock Exchange, Financial Assets, Development and Enterprise Markets, World Federation of Exchanges, Market Capitalization, Debt Instruments, Mauritian Stock Market, Beta Risk.