CHAPTER 3 METHOD

Data To fulfill the requirement of this study the secondary data has been use for analysis and data has been obtained from the web site finance.yahoo.com. The last five years data (stock prices) is collected on monthly basis of the fifteen companies because these fifteen companies have atleast one percent of the total market capitalization and also they have regular 60 months trading. available I have on chosen five years of data for analysis basis. In this data some of the because only last five years data of government T.Bills is monthly figures are missed but I have used last figure in next month because there was no bid offer during these months.

Sources Of Data Data is the integral part of the research. To reach an accurate and reliable source, search for the most relevant form of the data is a basic part of research work. based on Karachi Stock Exchange (KSE). The most The data has been obtained from the website and all analysis is useful source in this study is Internet that gives the valuable information regarding my problem. Personal visits have made at Islamabad Stock Exchange regarding the collection of the T.Bill data.

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Procedures The most important part of the study is to follow the right procedure. Five years data for a sample of fifteen companies had taken from the website in descending order. After collection of data it has arranged on spreadsheets according to month wise in proper series. Then monthly returns have calculated of the selected stock prices by using the following formula.

Val1- val0 + Dividend1 E(Rtn)sec = val0 E(Rtn)sec = Market Return on Security Val1 = Val0 = Market Value of Stock in month 1 Market Value of Stock in month 0

To calculate the risk of the companies we firstly find out the standard deviation of the security and standard deviation of the market. Capital asset pricing model has been used for analysis. The CAPM is one of the best-known methods for measuring risk.

Using the CAPM, the beta values are estimated by regressing the monthly return of a share in excess of the risk free rate on the monthly return of the market in excess of the

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risk free rate. The regression equation is of the following form: (Ri Where; Ri= monthly return on a share Rm= Market monthly return Rf= Risk free rate (rate on government bonds) ß = Beta In CAMP model described by Bundoo in his methodology Rf) = constant + ß (Rm - Rf)

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firstly computed the excess return of security on the risk free rate and than computed the excess return of the market on the risk free rate, after that regressed both the figures than we find the beta value. Whereas under the market model the month return on a share is regressed on the monthly return of the KSE index and the regression equation is of the following form: Ri = constant + ß Rm The results of both the models showed there is no variation or very little variation in beta value. Whereas beta is calculated by using the following equation: (rsec,mkt)(σ sec) Beta (ß) = σ mkt

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rsec,mkt = Correlation between market and return σsec = Standard Deviation of Market σmkt = Standard Deviation of Market If the standard deviation of the security is greater than the standard deviation of the market it means the beta value will be greater than the market beta that is 1.0. It also indicates that the stock prices will move up in the future because of the high risk.

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