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Financial Risk and Management Reviews

June 2020, Volume 6, 1, pp 14-21

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

Fahim Afzal

,

Pan Haiying

Fahim Afzal 1 ,

Pan Haiying 1 
  1. Business School of Hohai University, Nanjing, Jiangsu, PR. China. 1

on Google Scholar
on PubMed

Pages: 14-21

DOI: 10.18488/journal.89.2020.61.14.21

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Article History:

Received: 26 November, 2019
Revised: 30 December, 2019
Accepted: 04 February, 2020
Published: 18 March, 2020


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.

Keywords:

CAPM, APT, Risk analysis, Stock return, Stock risk, Asset pricing.

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Reference:

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Funding:

This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.

Acknowledgement:

Both authors contributed equally to the conception and design of the study.

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