Capital Asset Pricing Model for the Stock Market in Pakistan

Abstract

The Capital Asset Pricing Model (CAPM), within modern financial theory, offers a theoretical framework for pricing assets with uncertain returns. CAPM assesses systematic risk and proposes a linear relationship between risk and expected returns for any asset. It serves as a potent tool for pricing risky assets. In this present study, the trade-off between risk-return was investigated within the framework of CAPM and its validity was tested on the daily returns of companies listed in the chemical, textile and food sectors of the Pakistan stock market during the period July 2004- Feb 2014. The results of empirical testing by regression analysis supported the CAPM’s validity for these sectors in Pakistan and found CAPM β as a single factor which was priced by the market. The KSE-100 index was used as a market, and the year treasury-bills return rate was taken as a risk-free rate.