Validity of CAPM in predicting stock prices of selected companies listed on Karachi Stock Exchange

Abstract

Capital asset pricing model is one of the most widely used models. In this research data is computed in two parts. In first part sample of 15 large cap companies and in second part 15 mid cap companies data is computed. Quarterly data of eight year (2005-20012) is used. The results of the study reveals that when CAPM was applied on large cap companies there is weak correlation was noted between the predicted excess returns and the actual excess returns so CAPM is not the valid model for selected sample of large cap companies. When CAPM was applied on mid cap Company’s only the result of one company supported this model and the rest fourteen company’s results give evidence against this model. The strong correlation between the actual excess returns and the predicted excess returns were noted only for one company and other show weak correlation. The sample data of 30 company’s only one company support its validity and twenty nine companies’ result shows that this is not the valid model.