Testing Application of CAP Model on KSE-Pakistan: A Case Study on Tobacco Sector

Abstract

This study is conducted on Tobacco sector companies listed on stock exchange in Pakistan. Application of capital assets pricing model is tested. Data is collected from 2004-07 listed on KSE. Beta calculated through co variance of security with market. Findings raised question about the validity of CAP Model. Security returns are not as per the demand of the model. In certain years the actual return was much greater than required and in some other years the actual return was much lesser than required. The year in which actual return was more than required the security was undervalued and vice versa; consequently, investors misguided. The beta calculation depicted different results for different periods. Monthly relationship is stronger than weekly relationship. Beta with smaller period observations is higher than larger period observations.

Keywords: Capital assets pricing model, Pakistan, beta, KSE, returns

JEL Classification: G11, G12, G32