Abstract
This study is a comparison and contrast of the predictive powers of two asset
pricing models: CAPM and seven factor risk-return adjusted model, to explain
the cross section of stock rate of returns in the financial sector listed at
Karachi Stock Exchange (KSE). To test the models daily returns from January
2013 to February 2014 have been taken and the excess returns of portfolios
are regressed on explanatory variables. The results of the tested models
indicate that the models are valid and applicable in the financial market of
Pakistan during the period under study, as the intercepts are not significantly
different from zero. It is consequently established from the findings that all
the explanatory variables explain the stock returns in the financial sector of
KSE. In addition, the results of this study show that addition of more
explanatory variables to the single factor CAPM results in reasonably high
values of R2
. These results provide substantial support to fund managers,
investors and financial analysts in making investment decisions.
Madiha Riaz Bhatti , Abu Bakar Mirza. (2014) A COMPARATIVE STUDY OF CAPM AND SEVEN FACTORS RISK ADJUSTED RETURN MODEL, Paradigms , Vol 8, Issue 1.
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