This paper attempts to
test the functioning of Fama-French (FF) three-factor model at Chittagong
Stock Exchange (CSE). The three factors
include market risk premium, size risk and book to market risk. Nine portfolios
are constructed by taking daily closing prices of thirty selective stocks of
CSE from January 2010 to December 2014. Treasury bill rates of Bangladesh are
used as a proxy for the risk-free rate. This study finds, stocks with small
market capital outperform that of large market capital. It also observes that
higher book to market ratio yields poor earnings. Although return at CSE is
significantly influenced by rational size, it is weakly affected by value.
Being a rumor driven and inefficient market, the FF model has positive but
weaker explanatory capacity on stock returns at CSE.
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