THE STOCK PORTFOLIO PERFORMANCE OF PROPERTY-LIABILITY INSURANCE STOCK COMPANIES: USING THE K-FACTOR MODEL OF ARBITRAGE PRICING THEORY (CAPM, FACTOR ANALYSIS)

The general problem of portfolio performance evaluation has received much attention in recent years. Within the last decade a number of researchers have examined the stock portfolio performance of property-liability (P-L) insurance companies. Their studies are based on the Capital Asset Pricing Model (CAPM). The results are, however, inconsistent with respect to the performance of the stock portfolios of P-L insurance companies as compared to their risk-adjusted expected return. These inconsistent results may be partically due to the use of the CAPM as a prediction model of expected return.;A sample of twenty P-L insurance stock companies was randomly selected from the fifty largest companies in the industry as a representation of the industry as a whole. Data were collected on the monthly returns on the common stock portfolio of each of the twenty companies from 1971 to 1980. Jensen's portfolio performance measure was utilized in the context of both the K-factor model of the APT and the CAPM. A maximum likelihood factor analysis program was employed to estimate the common factors in the context of the K-factor model of the APT.;The results of empirical analysis indicated that the stock P-L insurance companies, as to their common stock portfolios, performed in a neutral manner over the period of the study regardless of the performance evaluation method employed. The empirical evidence also indicated that the K-factor model of the APT forecasted the return with a greater degree of accuracy than did the CAPM when the value weighted index was used as a market proxy.;The primary objective of this research was to evaluate the stock portfolio performance of stock companies in the insurance industry by employing not only the CAPM but also the K-factor model of Arbitrage Pricing Theory (APT). The supplemental objective of this research was to compare the forecasting ability of the K-factor model of the APT with that of the CAPM.