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Validity of capital asset pricing model: evidence from Karachi stock exchange

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  • Syed ali, Raza
  • Syed tehseen, jawaid
  • Imtiaz, arif
  • Fahim, qazi

Abstract

This study investigates the validity of Capital Asset Pricing (CAP) Model in Karachi stock exchange (KSE). The data of 387 companies of 30 different sectors on monthly, quarterly and semiannual basis are used. The Paired sample t- test is applied to find the difference between actual and expected returns. Results show that capital asset pricing model (CAPM) predict more accurately the expected return on a short term investment as compare to long term investment. It is recommended that the investors should more focus on CAPM results for short term as compare to long term investments in KSE.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32737.

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Date of creation: 10 Jun 2011
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Handle: RePEc:pra:mprapa:32737

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Keywords: Portfolio choice; Investment Decisions; Capital Assets Pricing Model; Risk;

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  1. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
  2. Patricia Fraser & Foort Hamelink & Martin Hoesli & Bryan Macgregor, 2004. "Time-varying betas and the cross-sectional return-risk relation: evidence from the UK," The European Journal of Finance, Taylor & Francis Journals, vol. 10(4), pages 255-276.
  3. Nicolaas Groenewold, 1997. "Share Prices and Macroeconomic Factors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(9&10), pages 1367-1383.
  4. Ho-Chuan Huang, 2000. "Tests of regimes - switching CAPM," Applied Financial Economics, Taylor & Francis Journals, vol. 10(5), pages 573-578.
  5. Sharpe, William F., 1967. "Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(02), pages 76-84, June.
  6. Ravi Jagnnathan & Ellen R. McGrattan, 1995. "The CAPM debate," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-17.
  7. Martin Scheicher, 2000. "Time-varying risk in the German stock market," The European Journal of Finance, Taylor & Francis Journals, vol. 6(1), pages 70-91.
  8. Ravi Jagannathan & Zhenyu Wang, 1993. "The CAPM is alive and well," Staff Report, Federal Reserve Bank of Minneapolis 165, Federal Reserve Bank of Minneapolis.
  9. Blume, Marshall E & Friend, Irwin, 1973. "A New Look at the Capital Asset Pricing Model," Journal of Finance, American Finance Association, vol. 28(1), pages 19-33, March.
  10. Basu, Sanjoy, 1983. "The relationship between earnings' yield, market value and return for NYSE common stocks : Further evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 129-156, June.
  11. Reza Raei & Shapour Mohammadi, 2008. "Fractional return and fractional CAPM," Applied Financial Economics Letters, Taylor and Francis Journals, Taylor and Francis Journals, vol. 4(4), pages 269-275.
  12. Juan-Pedro Gomez & Fernando Zapatero, 2003. "Asset pricing implications of benchmarking: a two-factor CAPM," The European Journal of Finance, Taylor & Francis Journals, vol. 9(4), pages 343-357.
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Cited by:
  1. Syed Raza & Syed Jawaid, 2014. "Foreign capital inflows, economic growth and stock market capitalization in Asian countries: an ARDL bound testing approach," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(1), pages 375-385, January.
  2. Raza, Syed Ali & Jawaid, Syed Tehseen & Adnan, Muhammad, 2013. "A DuPont Analysis on Insurance Sector of South Asian Region," MPRA Paper 49289, University Library of Munich, Germany.
  3. Raza, Syed Ali & Raza, Syed Aoun & Zia, Abassi, 2011. "Equity mutual funds performance in Pakistan: risk & return analysis," MPRA Paper 36804, University Library of Munich, Germany.
  4. Raza, Syed Ali & Jawaid, Syed Tehseen & Afshan, Sahar, 2013. "Is Stock Market Sensitive to Foreign Capital Inflows and Economic Growth? Evidence from Pakistan," MPRA Paper 48399, University Library of Munich, Germany.

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