Revisit the Use of Index Returns as the Proxy of Market Return in CAPM

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Muhammad Irfan Hilman
Deddy Priatmodjo Koesrindartoto


This study compares the performance of the capital asset pricing model (CAPM), which uses a mean-variance optimal portfolio, and the Jakarta Composite Index (JCI) as the market return proxy. The data samples are monthly stock returns of Kompas 100, LQ45, and IDX30 index from September 2012-August 2022. The expected returns of assets are calculated using the CAPM with rolling regression methodology based on each index's 2-5 years period. The mean-squared errors for each sample group are calculated to determine the CAPM performance. Although the market indexes have a sub-optimal risk and return profile according to their position on the efficient frontier diagram, this study finds that the JCI as the market proxy results in better CAPM performance than the optimal portfolio. However, the beta results from using JCI as the market proxy are also consistently higher than those using an optimal portfolio, leading to the overestimation bias of the asset risk. Since most studies in CAPM testing use the market index as the market return proxy, particularly JCI in Indonesia, this study provides new insight into the challenges of using the optimal portfolio as the market return proxy.


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Hilman, M., & Koesrindartoto, D. (2023). Revisit the Use of Index Returns as the Proxy of Market Return in CAPM. Eqien - Jurnal Ekonomi Dan Bisnis, 12(03), 315 - 327.