Risk and return profile using icapm Evidence by ff3 portfolios on kse 100-index
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Date
2016
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University of Management and Technology Lahore
Abstract
This paper analyzes the ICAPM multifactor models, tested over 6 portfolios sorted on size and book-to-market of KSE 100 Index. Companies are included in the study for the calendar year 2010 to 2014 that are listed in KSE 100 index. The Company should have regular price record at the end of every year and should provide accounting data publicly available for June of every year to be selected in sample.For state variables, used macroeconomic variables (Dividend yield, and term spread), Data used from the 3-monthTreasury bill, and 1-yearTreasury bill for term spread. The term spread and dividend yield are usedascontrolvariables. Thetermspreadiscalculatedasthedifferencebetweenthe yields on the1-yearTreasury bill andthe3-monthTreasurybill. The empirical result of ICAPM in individual portfolio is according to size and book to market. Market risk premium has insignificant effect on BL, BM and BH portfolios. But the market risk premium has significant effect in SM, SL and SH portfolios. The intercept of all of the six portfolios has significant value. The invention and state variable of investment opportunity of dividend yield has insignificant effect in two of the portfolios from all of the six portfolios. The term spread capture the variations in the level of slope yield curve, the term spread is insignificant in one portfolio SH out of six portfolio hence remaining five SL, SM, BL, BH, BM is significant. We can say that the dividend yield has effect on the business risk of the firm. The small firms have more tendency to be elastic in such business risk because of its fast financial flexibility. Term spread is considered as one of the essential parts of the investment opportunity set as the invention and improvement in term spread and risk free rate are closely related to business cycle. Due to cash flow constraints and high financial leverage in small firms, there is less chance of their survival during bad economic condition (Viale, 2009). Afterward, the small firms represent more sensitivity to the news about the business cycle stage. As a result, investor demanded a premium when they investin small firms. The large firms have high capability to handle the financial and business risk. So, if we consider only the size factor, it represents that the large firms are comparatively less affected by the invention and changes in term and risk free rate.
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Supervised by:Prof. Dr. Naveed Tahir
Keywords
FF3 portfolio, KSE-100 Index, MS Thesis