VALIDITY OF CAPITAL ASSETS PRICING MODEL (CAPM): EVIDENCE FROM CEMENT SECTOR OF PAKISTAN LISTED UNDER KARACHI STOCK EXCHANGE.

Abstract

The present study examines the Capital Asset Pricing Model (CAPM) for the Pakistan stock market using monthly stock returns of the Cement companies listed on the Karachi Stock Exchange for the period of January 2004 to December 2009. This study demonstrates that the model is not valid in its applications in all the listed cement companies to elucidate the accurate expected returns. The findings of this study are not substantiating the theory’s basic result that higher risk (beta) is associated with higher levels of return. The model does explain,
however, excess returns and thus lends support to the linear structure of the CAPM equation. The results of the study lead to negate the hypotheses and offer evidence against the CAPM. Additionally, this paper investigates whether the CAPM adequately captures all-important determinants of returns including the residual variance of stocks. The results demonstrate that residual risk has no effect on the expected returns of portfolios.