Emperical Study of Capital Asset Pricing Model: A Case Study of Oil and Gas Sector of Pakistan

The Capital Asset Pricing Model (CAPM) has been a commonly used technique in the global investing community for calculating the required return of a risky asset. This paper investigates whether CAPM is a valid model for determining price/ return of oil & gas sector companies listed on the Karachi Stock Exchange (KSE). The purpose of the research is also to identify plausible reasons for deviations from the theories. The conclusions arrived at through data analysis reveal a weak correlation between realized excess returns (i.e. actual returns over and above the risk-free rate) and the expected return based on CAPM. With respect to model, the study reflects that changes in exchange rate and market return do not serve as valid determinants of returns on oil and gas producing companies’ stocks.