Evaluating the Effectiveness of CAPM and APT for Risk Measuring and Assets Pricing

Abstract

Persistent with the problem of quantifying the risk associated with securities, this study examines the applicability and validity of Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) while evaluating the stock prices and returns of listed companies in the Pakistan stock exchange. While examining the applicability of CAPM and APT, this study considers the stock return of top ten sectors listed in stock exchange from the period of 2014 to 2019. The result shows that the application of APT for risk estimations may not be showing satisfactory results from the observed data. On average, the p-value is more than 30% for all factors which should be less than 5%. Therefore, in order to compare the application of methods and find out the stock risk, it can be concluded that CAPM approach is more reliable than APT. Thus, it is suggested to adopt the CAPM approach to estimate the realistic stock returns. Additionally, the investor can also consider different indigenous and exogenous economic factors according for calculating market risk and maximizing the return. Contribution/Originality:This study contributes in the existing literature in a way to show that CAPM is still a valid tool to estimate the return in Pakistani capital market, which implies that the market risk can better be estimated by the companies. Investors must consider the market index performance for realistic stock return rather to follow other economic indicators.

The Impact of Interest Rates on the South African Equity Market

“…On the other hand, Zhong and Enke (2017) and Shah et al (2019) stated that financial variables like equity prices, stock market index values, and the prices of financial derivatives are generally believed to be predictable. Putting a price on a stock, equity, instrument, or asset is highly technical but a crucial phase for investors in the stock markets to predict the future price of the stock in which they are investing (Afzal and Haiying 2020). Chong et al (2017) pointed out that many empirical studies are widely accepted and show that financial markets are predictable to some extent.…”

“…To determine which stocks are suitable for buying in the equity market, investors need the ability to estimate the expected rate of return (Yunita et al 2020). Investors have tried different techniques over the years to predict the expected prices of assets, and equity market investors always look for specialized instruments that capture the risks associated with their investments in order to maximize their return or profit regardless of risk levels (Afzal and Haiying, 2020). According to Yunita et al (2020), investors and other equity market stakeholders use the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) to estimate the expected rate of return.…”

“…According to Yunita et al (2020), investors and other equity market stakeholders use the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) to estimate the expected rate of return. Afzal and Haiying (2020) stated that the most efficient methods through which the risk and return can be calculated are the CAPM and APT as they are useful in predicting the expected stock values and as well as helpful to institutional and individual investors vis-à-vis the pricing of stocks.…”

Analisis Komparasi Metode CAPM dan APT dalam Memprediksi Return Saham LQ45 2019-2021

“…Capital gain ataupun dividen merupakan bagian dari return saham. Return biasanya lebih diinginkan oleh investor dibandingkan risiko, yang artinya aktiva yang kurang berisiko lebih diminati investor namun sekaligus juga berharap mendapat return yang tinggi (Afzal & Pan, 2020;Evan et al, 2021;Jones, 2020;Safitri et al, 2019;Susanti et al, 2021).…”

“…Sehingga membuat Arbitrage Pricing Theory menjadi teori pengganti bagi pengambil keputusan investasi yang menjelaskan hubungan risiko dan pengembalian yang diharapkan dengan menggunakan banyak faktor, bukan indeks pasar tunggal. Ross menyatakan bahwa variasi return yang diharapkan disebabkan oleh perubahan PDB, inflasi, perubahan interest rate dan variabel ekonomi lainnya (Afzal & Pan, 2020;Ch'ng et al, 2020;Elshqirat, 2019;Evan et al, 2021;McLelland, 2018;Rahmadhani, 2019;Wu, 2022).…”