4.1 ANALYSIS OF THE DATA:
The
analysis of my project based on quarterly and yearly average returns, computed
by the stock prices of a five sample companies listed in Karachi Stock
Exchange. The study revealed the variations between actual return and CAPM
return and it also investigated the Question about the validity of CAP model.
The actual return calculated by using the following formula.
Actual Return
R = (S1-So)/So
(eq-1)
Where
R
= Actual Return
S1
= closing share price at the end of each quarter from Jan, 2007 to Dec,
2011
So = opening share price at the
beginning of each quarter from Jan, 2007 to Dec, 2011
Market Return
The
Market Return is calculated by applying the same formula, RM
= (S1-So)/So
Here
RM
= Market Return based on Kse-100 index
S1
= closing value of kse-100 index at each quarter covering periods Jan, 2007 to
Dec, 2011
So
= opening value of kse-100 index at each quarter covering periods Jan, 2007 to
Dec, 2011
CAPM Return:
The
CAPM return (required return) is calculated by using the following formula.
First I calculated the variables Of CAP model in the following manner.
Required
Return = RF + B (RM-RF) (eq-2)
Where
RF
= T-Bill Quarterly rate used as a risk-free rate
BETA
(B) = Beta Calculated by Applying the slope Formula in Excel, slope between the
Actual return and Required Return which shown in the finding Section and whole
results appear in Appendix. Beta determines the market Risk which can’t be
diversified by making a portfolio of security because it is a systematic risk,
which changes the behavior with market. The Beta in my study stated the
sensitivity of actual returns with the market returns (KSE-100 index).
Alternative method of Beta calculation also elaborates on the next page.
Beta
(B) = Covim/ Varm
(eq-3)
Where:
Covi,m = Covariance
between security i and stock market index.
Rm = Return
of stock market index.
Av.Rm = Average
Return of stock market index.
RI = Return
of individual security i
Av.Ri = Average
Return of individual security i
Varm = Variance
of stock market index
The covariance used in
the above equation is computed by the following formula.
Covim = 1/n ∑(Rm - Av.Rm)*(Ri
- Av.Ri) (eq-4)
The
covariance of market and individual stock is calculated by applying the formula
of covariance in excels between the calculated actual return and required
return by (CAPM).
The
next pages contain all the results by using excel.
1-AL-ABASS SUGAR MILL:
2-MEHRAN SUGAR MILL:
3-HABIB SUGAR MILL:
4-AL-NOOR SUGAR MILLS:
5-MIRPURKHAS SUGAR MILL:
4.2 INTERPRETATION OF RESULTS:
Findings
of the study suggest that the CAPM return (required return) is not match the
actual return of the stocks as shown in table 1. The performance of the CAP
model always be a questioned mark, however, during the analysis CAP model most
of the time required return underperformed or over-performed from the actual
return as shown in the following table.
TABLE-1
(Comparison
of Actual return and CAPM return with respect to BETA)
From
the above table, the Al-Abass sugar stock Actual return is higher in year 2008
and 2009 than the required return, based on CAPM while in 2007, 2010 and 2011
the actual return is lesser than the required return which clearly shows that the CAPM return are not up to
mark. So the investor decision based on CAP model may be misleading due to high
difference exists between CAPM return and the actual return.
With
respect to the returns of Mehran sugar during the period from 2007 to 2011 as
shown in Table - 1, the CAPM return has underperformed (less) twice while CAPM
return has overperformed (greater) three times which results in variations
between the CAPM return and actual return. So the validity does not hold in the
mehran sugar stock and the investor estimation of return with the CAPM not up
to the mark.
From
the table-1 the Habib sugar stock actual return not similar to the CAPM
required return, the results indicates that CAPM return during 2008 and in 2010
overperformed (greater) from the actual return while in 2007 , 2009 and 2010
CAPM return underperformed (less) than the actual return. Furthermore, the performances
of CAPM (Capital Asset Pricing Model) are explained in Table-2 with the
remaining firms.
TABLE -2
(Comparison
of Actual return and CAPM return with respect to BETA)
The
Table-2 showing the result of CAPM required return and actual return of the two
firms covering period from 2007 to 2011 namely; Al-Noor Sugar Mill and
Mirpurkhas Sugar Mill, the performance of the CAPM are not up to the mark and
the differences in returns are -16.2% (minimum) to 16.11% (maximum). In Al-Noor
Sugar Mill, during 2007 to 2008 the CAPM required return overperformed than
actual return and in 2009 to 2011 the CAPM required return underperformed than
the actual return. In Mirpurkhas Sugar Mill, the CAPM required return are
greater than actual return result in CAP model overperformed from the actual
return during 2007 to 2011. So the investor will be misguided by using CAP
model for the investment decision particularly in sugar sector stock listed in
KSE-100 index.
4.3 GRAPIHCAL ILLUSTRATION:
GRAPH - 1
Key Findings:
In
the above graph the actual return is higher in the 2008 (13.87%) and in 2009
(6.76%) than CAPM required return in 2008 (4.52%) and (0.23%) while in 2007,
2010 and in 2011 actual return is lower than the CAPM required return and only
in the year 2011 the difference between actual return and required CAPM return
is very low. So the results concludes that the overall CAPM required return are
not up to the mark with actual return and CAPM validity has
does
not exits in AL-ABASS sugar company and the investor can’t predict the closest
expected return by using the CAP model.
GRAPH - 2
Key Findings:
From
the above graph, the actual return is higher in 2008 (19.65%), 2009 (23.72%)
than the CAP model required return while in the year 2007, 2010 and 2011 the
actual return is lower than the CAP model required return as shown in the above
graph. The difference between the actual return and the CAP model return is
lower in 2011 while in 2008 to 2010 the difference is higher between actual
return and CAPM required return. So the CAPM validity does only hold in 2011
and the overall CAPM validity does not hold and the investor can’t predict the
stock return with the Capital Asset Pricing Model.
GRAPH-3
Key Findings:
In
Habib Sugar Mill, the above graph shows that the actual return is higher in
2007 (19.54%), 2009(8.99%) and 2011(7.86%) while in 2008 and 2010 the actual
return is lower than CAPM return. The difference in actual return and CAPM
return is lower only in 2010 which shows to
some extent CAPM model predict the stock return during 2010. However the
overall validity of CAPM during 2007-2011 does not hold to predict the stock
return of Habib Sugar.
GRAPH-4
Key Findings:
In
Al-Noor Sugar Mill, the above graph shows that the actual return is higher in
2009 (13.39%), 2010(17.48%) and 2011(3.62%) while in 2007(7.19%) and
2008(-5.33%) the actual return is lower than CAPM return. The difference in
actual return and CAPM return is lower only in 2011 which shows to a some
extent CAPM model predict the stock return during 2011. However the overall
validity of CAPM during 2007-2011 does not hold to predict the stock return of
AL-Noor Sugar.
GRAPH-5
Key Findings:
From
the above graph, the actual return is lower than the CAPM required return
during the period 2007-2011. The
difference between the actual return and the CAP model return is much higher in
2008, 2009 and 2010 while in 2007 and 2011 the difference is lower between
actual return and CAPM required return. So the CAPM validity does only hold in
2007 and 2011 not exactly but up to a some extent. However, the overall CAPM
validity does not hold and the investor can’t predict the stock return with the
Capital Asset Pricing Model.
MANAGEMENT REPORT
The
primary objective of the research is to testing the validity of CAP model in
predicting stock returns of the companies listed in KSE-100 index, specifically
in sugar sector. Data is collected from the official website of Karachi Stock
Exchange (www.kse.com.pk).
The sample size of the study is five (5) companies taken by simple random
sampling technique from total companies listed in sugar sector of KSE. The
analysis is based on the quarterly data covering the periods of five year from
Jan, 2007 to Dec, 2008. The actual
returns of each company calculated from the only shares price dividends are not
considered. The findings suggests that the difference between the actual return
and CAPM required return are some time higher in certain years while in another
years difference is lower. Difference is ranging from minus 18.06% to positive 19.20%, results in greater
variations between returns that causes the CAPM applications does not hold when
applying on KSE, sugar sector. The causes of variations between the actual
return and CAPM return is the BETA, as it covers all the risk factors that
effects on the stock prices. But it is not the true because every factor has
the own risks. So, I conclude that the finding of CAPM required return with
only one BETA is impossible and it never matches the actual return, not only in
case of Pakistan (KSE) and also in other countries the validity does not hold
as I elaborated in literature Review.
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