The Analysis of the Validity of Capital Asset Pricing Model: Evidence from Pakistan Stock Exchange

Abstract

The aim of this study was to find evidence for the implementation of capital asset pricing model (CAPM) on companies listed at Pakistan StockExchange before, during and after financial crisis. The data of 50 companies were collected ranging from various sectors of Pakistan stockexchange. Data were divided into 3 different groups: year 2005-2007, 2008-2010 and 2011-2013. Regression analysis was conducted for testingthe hypotheses by taking Pakistan stock exchange 100 index as independent variable and individual stocks return as dependent variable.Three different levels of significance have been used: significance at 1%, significance at 5%, and significance at 10%. The results suggested that inPakistan different business organizations due to narrow scope of business are relatively less diversified and have relatively high flexibility ofresponding unexpected and uncertain events, influencing overall market performance. Similarly, large number of companies, specifically duringperiod of financial crisis, are affected and influenced by numerous risk factors. It was concluded that fair prices of stock cannot be determinedwith the help of CAPM in Pakistan.