Impact of Capital Asset Pricing Model (CAPM) on Pakistan (The Case of KSE 100 Index)

Abstract

In this paper two estimated return on stock models i.e. standard Capital Asset Pricing Model (CAPM) and 3 F Models are compared in order to get information that which determine better estimates the return on stock in Pakistani capital market. For this purpose time series monthly data from secondary sources for a period of 2003 to 2007 has been taken.  CAPM were tested for the five sizes and book to market portfolios from Karachi Stock Exchange. Pakistan T-bill rate is taken as risk free rate. However basic problem with (CAMP) was predictive power Predictive power and Robustness of results. For this purpose capital asset pricing model was applied. Dependent variable portfolio represented by. The excessive return shows the return above that of the risk free rate  that is required by the investor for taking additional risk. While independent variables were market risk premium.

Research Findings are as follows:

CAPM better estimated the return in Pakistani capital market as compared to Fama and French Three Factor model

1. In case of CAPM, it was able to show the existence of risk premium as the only factor affecting the stock return.

CAPM better estimates the return on equity in the context of Pakistani capital market so it is preferable to use, however, caution should be exercised in generalizing the applying the result on other stock markets because F&F model has estimated well in most stock markets of the world.

Keywords: CAMP, Market portfolio, KSE, Risk Premium

i

ii

, Fama & French 3 factor model