Testing of Capital Asset Pricing Model Empirical Evidence from Equity Market of Pakistan

BY

MUHAMMAD BILAL
B.com (PU)

A research project submitted in partial fulfillment Of the requirements for the degree
OF

MASTER OF BUSINESS ADMINISTRATION

IN

FINANCE

INSTITUTE OF BUSINESS MANAGEMENT AND SCIENCES FACULTY OF SOCAL SCIENCES UNIVERSITY OF AGRICULTURE, FAISALABAD 2012

Declaration

I hereby declare that contents of the research project, Testing of Capital Asset Pricing Model, Empirical Evidence from Equity Market of Pakistan are product of my research and no part has been copied from any published source (except the references, standard mathematical or genetic models/equations/ formulate/protocols etc.) I further declare that this work has not been submitted for award of any other diploma/degree.

Muhammad Bilal 2010-ag-958

To The Controller of Examination, University of Agriculture, Faisalabad.

We, the supervisory committee, certify that the contents and form of research project submitted by Mr. Muhammad Bilal, Reg No. 2010-ag958, have been found satisfactory and recommend for the award of degree.

SUPERVISORY COMMITTEE:

CHAIRMAN : --------------------------------------Mr. Kashif Hamid

MEMBER : ------------------------------------------Mr. Yasin Zia

MEMBER : ------------------------------------------Dr. Abdul Ghafoor

ACKNOWLEDGMT

Do not consider what your eyes tell you. All they show is limitation. Consult carefully with your understanding, learn what you already know, and you will see how to fly.
(Richard Bach)

First let me say thanks to Almighty God (the Creator of all), which is the most merciful, most beneficent and benevolent. He has blessed me abilities to accomplish this task successfully.

I would like to say special thank you to my respected teacher "KASHIF HAMID BOPARAI" which has always provided me all these amenities, I need; recognition of their support for me. Who taught me how to assess that the dark side of the mirror with an overview of the look on the bright side and depth to the rules of research. This project is because of all the efforts that my teacher did, so I could be able to work hard with patience and determination.

ABSTRACT

Capital Asset Pricing Model (CAPM) provides an equilibrium linear relationship between expected return and risk of an asset. The purpose of this research project is to investigate a riskreturn relationship within the CAPM framework. The study also aims at exploring whether CAPM is a good indicator of asset pricing in PAKISTAN. For this study, a period 2007-2011 have been considered. In the present findings on the CAPM The CAPM has low explanatory power in explaining expected returns in Pakistani Stock Market. The explanatory power of beta on the horizon of time trials five years is low.

Keywords : CAPM, Pakistani stock market, Beta