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In recent years, the rapid and significant development of emerging markets has globally led to insight from potential investors and academicians seeking to assess these markets in terms of risk inheritance. Therefore, this study aims to explore the validity and applicability of the capital asset pricing model (henceforth CAPM) and multi-factor models, namely Fama–French models, in Pakistan's stock market for the period of June 2010–June 2020. This study collects data on 173 non-financial firms listed on the Pakistan stock exchange, namely the KSE-100 index, and follows Fama-MacBeth's regression methodology for empirical estimation. The empirical findings of this study conclude that small portfolios (small-size companies) earn considerably higher returns than big portfolios (large-size companies). Ultimately, the risk associated with portfolio returns is reported to be higher for small portfolios (small-size companies) than for big portfolios (large-size companies). According to the regression output, the CAPM was found to be valid for explaining the market risk premium above the risk-free rate. Similarly, the FF three-factor model was found to be valid for explaining time-series variation in excess portfolio returns. Later, we added human capital into FF three- and five-factor models. This study found that the human capital base six-factor model outperformed the other competing asset pricing models. The findings of this study indicate that small portfolios (small-size companies) earn more returns than big portfolios (large-size companies) to reward the investor for taking extra risks. Investors may benefit by timing their investments to maximize stock returns. Company investment in human capital adds reliable information, replicates the value of the company and, in the long term, helps investors make rational decisions. [ABSTRACT FROM AUTHOR]

The study develops and examines the relationship of the liquidity based ten portfolios with systematic risk using the daily data of 467 non-financial firms in Pakistan between 2014-2018. The study calculated the systematic risk using the Capital Asset Pricing Model (CAPM) whereas, the liquidity of the stock was calculated based on trade volume. Ten liquidity portfolios were constructed using Fama McBeth approach to test the relationship between risk premium and firm returns. The study finds the significant impact of risk premium on firm returns in highly liquid stocks. However, the low liquidated stocks had insignificant role of risk premium on firm returns. The study further suggests that the firms which have low volume of trading in the portfolios are prone to market/systematic risk. [ABSTRACT FROM AUTHOR]

This study examines the role of quality minus junk factor in explaining cross-sectional differences in stock returns for the equity market of Pakistan. A new factor quality minus junk has been added to the existing Fama & French three factor model (1993) as a fourth factor to check whether it is priced as a risk factor. The study also compares the explanatory power of the newly proposed model with the existing single-factor Capital Asset Pricing Model (CAPM) and Fama & French three factor model (1993). A high quality data set of 70 non-financial firms listed on the PSX is employed as a sample for the period 2008-2016. Results show that quality minus junk factor is priced in the equity market of Pakistan and this newly proposed four factor model has significantly higher explanatory power than the existing three factor model. [ABSTRACT FROM AUTHOR]

This study examines the rationality of utilizing the capital asset pricing model in Pakistani banking sector. The estimated return on banking sector is used as a proxy for measuring the best possible estimate of the stock return on banking sector in Pakistan. For conducting this study, the data was collected from 20 banks in total covering the period of 2006-2017 for which the time series yearly based pooled was applied. The capital asset pricing model is applied for the size and book to market portfolios. The excessive return is taken as dependent variable reflects that the investors required excessive return over the above Rf in order to take any additional risk, while independent variable used in study is market risk premium. The study shows that capital asset pricing model reflects more precisely the expected return. [ABSTRACT FROM AUTHOR]

This research investigates the determinants of cost of equity using a data set of 263 firms listed on Pakistan stock exchange. Keeping in view the signaling effect of information on the performance of capital markets in Pakistan, we used Capital Asset Pricing Model (CAPM) to calculate the cost of equity. Correlation and regression analysis were run to test the main effect of net earnings, retention of fund, time interest earned, gearing, fixed asset backing, long term debt, tax, market capitalization on cost of equity. The results’ robustness is evidenced that market capitalization has significant impact on cost of equity. We also show that net earnings growth, retention of funds, times interest earned, gearing, fixed asset backing, long term debt and tax have no impact on cost of equity. Finally, we find a sector-specific range of cost of equity that falls between 11.54 to 16.78 percent. This indicates that financial markets in Pakistan are more volatile with respect to any information in line with the signaling theory. [ABSTRACT FROM AUTHOR]

Mutual Fund is a choice of investment for the small investors to invest in capital market through skillful professional management. The research paper attempts to validate the Capital Asset Pricing Model and Fama French 3-Factors Model and their preferred suitability in measuring and evaluating the mutual fund performance in Pakistan. The month wise data of one hundred open ended Pakistani mutual funds for the period from 2009 to 2015 is analyzed by both models. The Capital Asset Pricing Model showed significance results for all the portfolios; however the intercepts of this model were found increasing in size, showing poor performance for the high performance portfolios. The Fama French 3-factors model demonstrated poor results for two factors i.e. fund size and fund value, however the market factor showed significant coefficients for all the portfolios. The Gibbon Ross Shanken test was applied to find the best model between the two competing models. This test results revealed that Capital Asset Pricing Model is the preferred model between the two competing models. [ABSTRACT FROM AUTHOR]