Testing the Validity of CAPM and APT in the Oil, Gas and Fertilizer Companies Listed on the Karachi Stock Exchange

14 Pages Posted: 19 Aug 2011 Last revised: 27 Feb 2012

See all articles by H. Jamal Zubairi

H. Jamal Zubairi

Institute of Business Management

Shazia Farooq

Institute of Business Management (IoBM)

Date Written: June 25, 2011

Abstract

The Capital Asset Pricing Model (CAPM) and Arbitrage Portfolio Theory (APT) have been commonly used techniques in the global investing community for calculating the required return of a risky asset. This paper investigates whether CAPM and APT are valid models for determining price/return of the fertilizer and the oil & gas sector companies listed on the Karachi Stock Exchange (KSE). The purpose of the research is also to identify plausible reasons for deviations from the theories. The conclusions arrived at through data analysis reveal weak correlation between realized excess returns (i.e. actual returns over and above the risk free rate) and the expected return based on CAPM. With respect to APT model, the study reflects that macroeconomic factors including changes in GDP, inflation, exchange rate and market return do not serve as valid determinants of returns on oil, gas and fertilizer stocks.

Keywords: asset pricing theory, Capital Asset Pricing Model, Arbitrage Pricing Model, macro-economic factors, Karachi Stock Exchange

JEL Classification: G11, G12

Suggested Citation

Zubairi, Hamid Jamal and Farooq, Shazia, Testing the Validity of CAPM and APT in the Oil, Gas and Fertilizer Companies Listed on the Karachi Stock Exchange (June 25, 2011). 2012 Financial Markets & Corporate Governance Conference, Available at SSRN: https://ssrn.com/abstract=1912358 or http://dx.doi.org/10.2139/ssrn.1912358

Hamid Jamal Zubairi (Contact Author)

Institute of Business Management ( email )

Plot # 84
Korangi Creek
Karachi, Sindh 75190
Pakistan
92-21-111002004 (Phone)

Shazia Farooq

Institute of Business Management (IoBM) ( email )

Plot # 84
Korangi Creek
Karachi, Sindh 75190
Pakistan

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