Testing Short Term and Long Term Applicability of CAPM: A Case of Pakistani Cement Industry

Abstract

This study is conducted to investigate the long term and short term relationship between Risk and Expected Return using the Capital Asset Pricing Model in the cement industry of Pakisatn. Pakistan Stock Exchange Database, Business Recorder and Yahoo Finance were used for collecting data. Moreover, monthly data from July-2009 to June-2015 was used for performing this analysis. Previous studies show that this time period is not analyzed yet for performing the CAPM analysis. Microsoft Excel was used for performing the analysis. In the short term 114 observations were used for performing the analysis and it suggested that only 7 observations are supporting the CAPM. In the long Term or on the average basis, only 7 firms out of 19 firms show favorable results of CAPM. Hence using the results of table 1-20 we can conclude that CAPM is not a valid tool for the investor for finding the Risk and Expected Return.

Keywords: CAPM, Cement Industry, Expected Return, Long Term, Short Term, Risk