Stock Market Analysis

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

1

TABLE OF CONTENTS Chapter #1 Introduction and Background 1.1

Objective of the study

07

1.2

Problem Statement

07

1.3

Theoretical Framework

08

1.4

Significance of the Study

09

1.5

Scope of the Study

10 Chapter #2 Literature Review

2.1

Empirical Evidence from Developed Markets

11

2.2

Pakistani Equity Market

16

Chapter # 3 Research Methodology and Design 3.1

Type of the Study

19

3.2

Source and Type of Data

19

3.3

Statistical Tools

20

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

2

Chapter # 4 Analysis and Interpretation of Data 4.1

Risk and Return Analysis

21

Conclusion References

59 60

Table (4.1) Table (4.2) Table (4.3) Table (4.4) Table (4.5) Table (4.6) Table (4.7)

21 26 30 34 38 42 44

Figure (4.1.1) Figure (4.1.2) Figure (4.1.3) Figure (4.1.4) Figure (4.1.5)

46 47 48 49 50

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

3

CHAPTER # 1

INTRODUCTION AND BACKGROUND Stock markets play an important role in facilitating productive investment and thereby promoting economic growth. Capital markets can play a crucial role in mobilizing domestic and foreign resources, and channeling them to the most productive medium and long-term uses. Since these funds are not intermediated, resource allocation should be more efficient. The existence of an efficient equity market, an integral part of financial system, is a pre-requisite for the smooth functioning of an economy. The equity markets cater the needs of finances for the private investments and public sector development programs and play an important role in mobilizing institutional and individual saving and channeling these to the productive activities of the economy.

An

efficient

equity

market

therefore

helps

in

expanding

the

commercial and industrial base, thereby stimulates economic activity, the end of which is increase in job opportunities and per capita income. Stock markets are referred to as foundations to the national economy. The reason is that, for strong economic growth and development; the existence of a vibrant equity market is the basic pre-requisite. In essence stock markets serve the purpose of supporting and complementing the productive activities of the economy by performing functions regarding the mobilization and allocation of savings for the long term funding exigencies of business and industry. Thus stock markets help in

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

4

expanding the commercial and industrial base and a result creating job opportunities and increasing national output and per capita income.

Stock exchanges also provide necessary stimulant to institutions working for promoting virtue of thrift, in carrying out their aims and objectives that are mainly

to

attract

savings

and

to

utilize

them

profitably

for

industrial

development. With these actions of the capital market the base of industrial finance has greatly widened and a large number of small investors are induced to put their savings in equity investment. Thus it is obvious that for such a purpose the existence of the stock markets become indispensable.

At the time of independence, there were only a few industries in Pakistan and the related institutional framework was weak. A few insurance companies and the managing agency systems were the only platform for trade in funds. Commercial banks were mostly engaged themselves in financing commercial operations. The establishment of State bank of Pakistan in 1948 as the central bank of the country laid foundation for an organized money market. The need to establish a stock exchange was felt at the time of independence and the government had taken steps to setup a stock exchange at Karachi in September 18, 1947, which was converted into a registered company limited by guarantee on March 10, 1949. At that time it had 90 members and 13 listed companies with paid up capital of Rs. 108 million. Though there were two other stock markets, later established in Pakistan at Lahore and Islamabad in 1970 and 1992 respectively. The Karachi Stock Exchange remains the main center of activity Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

5

where 75-80 % of the current trading takes place. Most of the companies Lahore and Islamabad stock exchanges are also listed at Karachi stock exchange. The turn over of Karachi stock exchange is fairly contributed by these two smaller but fast growing regional stock exchanges whose members send the unexecuted orders at their exchange to the Karachi stock exchange floor.

The main equity market in Pakistan is Karachi Stock Exchange (KSE), has been in operation for almost half of century. It has not been an active market until the beginning of 1991. During the year 1994, frequent crashes of the stock market show that the KSE is rapidly converting into a volatile market. Heavy fluctuations in stock prices are not an unusual phenomena however, such fluctuations have been observed at almost all big and small exchanges of the world. The major fluctuation has been observed in year 2001-2002 is after the 11 t h September event. The stock prices have been very frequently fluctuate, and the stock market also affected by the 10 t h October 2002 Elections. Pakistan had nuclear test on May 28, 1998 that has significant impact on KSE 100 and it declines from 1040.19 to 789.15 and trading volume from Rs 16 million to Rs 9 Million. The recent attack of USA on Iraq have also affect the Pakistani stock markets in March 2003.The frequent fluctuations in the stock market have been occurred due to uncertainty. Focusing on the reasons for such fluctuations is intrusive, and likely to have important implications. Nevertheless, the KSE offers an interesting set of circumstances to test the nature of market volatility.

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

6

Pakistan used number of measures in order to develop its capital markets, the major measures include economic liberalization, regulatory changes in foreign exchange controls, repatriation of profits and privatization of public sector enterprises and, most importantly, the opening of the equity market to international investors during 1991. However, the equity market in Pakistan is likely to regain its importance in the near future, especially in the light of major developments. Like, following the loan agreement with international monetary fund (IMF), Pakistan has been able to receive aid inflows from many sources, such as World Bank, Asian Development Bank and Islamic Development Bank and debt rescheduling arrangements are in the process.

It has been observed that in the past few years the opening of the Pakistani equity market to international investors has exposed it to frequent crashes, which indicated that the KSE, LSE, and ISE are highly volatile markets. The fluctuations in stock prices are usual phenomena and are daily observed in almost all stock markets of the world, small as well as large.

The average investors are risk averse, his/her objective is to maximize return with the minimum risk. Thus, given the rate of return, the stock markets that are relatively less volatile, are likely to attract more investment. However, what matters in the individual’s investment decision is the perception rather than realization; past experience matters to the extent that it influences future expectations about return and volatility. In other words, while making their investment decision investors consider expected return and expected volatility Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

7

conditional upon the available information. Thus the stock markets activities are usually

governed

by

information.

While

the

systematically

disseminated

information determines the ling-term trend and underlying strength of the market, the information that comes as a surprise event—the so called good or bad news- cause shocks to the stock markets and result in volatility. The ways investors interpret this news are crucial in forming expectations about the future course of events in the stock markets.

One relevant question is always remained on the forefront of financial theory, why the investors take risk of volatility when a wide range of “safe assets” exist. There is also a straight quotation, that high risk leads high return. A possible answer is given by the postulate that returns on stocks include a premium for risk that provides a sufficient incentive to take risk. This postulate has been known as Capital Asset Pricing Model or CAMP. Although this postulate has been applied time and again on almost all the major stock markets in the world, it has not been tested thoroughly for the KSE.

1.1

OBJECTIVE OF THE STUDY

The study is undertaken to address the following issues pertaining to activities at the KSE. Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

8

 To verify how risk affects the selected stock prices?

 To verify the relationship between risk and return of selected stocks?

 To verify nature of volatility in selected stocks, and how volatility affects the selected stock Returns?

1.2

PROBLEM STATEMENT

Literature describes that there is strong relation between risk and return, and they have great impact on stock return, sometimes this impact is positive and sometimes it is negative. It will be verified that how the risk affects the stock prices. Risk and return both are always be with stock market and have very strong relation. This report will verify the relationship between risk and return. One relevant question is always remained on the forefront of financial theory, why the investors take risk of volatility when a wide range of “safe assets” exist. This report studies the nature of volatility on the stock return and to verify how the volatility affects the stock return. It is very helpful for the individual investor to know how the stock market behaves and how the risk affects the stock prices. This research report is very beneficial for the individual investor to know that how volatility affects stock return.

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

1.3

9

THEORATICAL FRAMEWORK

The aim of this section is to define the relationship between the dependent and the independent variables. In this particular study, the dependent variable is return while the independent variable is risk.

Fama and French in (June 1992): They tested stock returns over the 19631990 period, they found that the size and market-to-book-value variables are powerful predictors of average stock returns. The risk and return have great impact on stock prices.

This effect can be either an increase or decrease in

stock prices. This impact may be the systematic risk factors or due to the unsystematic risk factors. The impact of risk on return is not a new phenomenon. The risk factor can be minimized but it cannot be eliminated entirely. Risk and return are interlinked, higher the risk depicts higher the return and lower the risk represents lower return. Farid and Ashraf (1995): describes that there was a strong positive correlation among the volume of trading, expected rate of return and volatility of stock prices. Uncertainty leads volatility. Uncertainty and volatility have direct relation, if the environment is highly uncertain than it leads high volatile market. Volatility is measured by the Beta. Fama and French (June 1998): describes that high beta describes that the firm is risky. The measure for this non-diversifiable risk is the beta coefficient -- which measures the volatility of an asset's returns compared to volatility of overall market returns. The higher the potential return, the higher the potential loss may be, and that negative returns are possible for all investment types. Though the literature Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

on

stock

market

prices

behavior

elaborate

variety

of

issues

but

10

this

review/research is restricted to some theoretical issues about, taking as top five active companies (KSE) by taking monthly data of last five years data and try to interpret and elaborate the relationship between risk and return. Hussain (1997) examined relationship between retunes and stock market volatility for Pakistani equity market using daily data. Khilji (1993) investigated the time series behavior of monthly stock returns in Pakistan over the period July 1981 to June 1992.

It is true that volatility affects the market. The persistence in volatility is not surprising: stock market volatility should depend on the overall health of the economy, and real economic variables themselves tend to display persistence. Ahmed and Rosser (1995): describes that volatile market prices also reflect optimism regarding future economic development. Stock market volatility tends to be persistent; that is, periods of high volatility as well as low volatility tend to last for months. In particular, periods of high volatility tend to occur when stock prices are falling and during recessions. Stock market volatility also is positively related to volatility in economic variables, such as inflation, industrial production, and debt levels in the corporate sector.

1.4

SIGNIFICANCE OF THE STUDY

This study contemplates and elaborates the relationship between risk and return. This study is extremely significant for the elaboration of the relationship

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

11

between risk and return and this study is also very helpful to know that how the risk affect the stock prices. This study also defines the nature of volatility at KSE. It describes how the volatility affects the stock return.

1.5

SCOPE OF THE STUDY

This study is carried out to cover following aspects:

 This study is based on secondary data.

 The quantitative analysis has been carried out on the basis of top 5 active companies, including PTCL, PSO, EC, FF, and MCB.

 The monthly data is used for analysis of last 5 years.

 300 observations have been analyzed in this report.

 There are three stock exchanges in Pakistan but our study is limited to Karachi Stock Exchange and All the analysis are based on Karachi Stock Exchange. Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

12

CHAPTER # 2

LITERATURE REVIEW

2.1

EMPIRICAL EVIDENCE FROM DEVELOPED MARKETS

The predictability of stock returns is studied using the framework of Ferson and Harvey 1993. They used capital asset pricing model where risk premium and risk sensitivities are conditioned on a range of financial information variables. In particular, they studied that the effect of the return interval on the predictability of short-term stock returns. Using daily, weekly, and monthly returns. They found that the predictability of returns increases with

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

13

the length of return interval, but so does the power of the capital asset pricing model to explain the predictability. They reported that the time variation in risk premium accounts for most of the predictability. However, the results show also there is a positive relationship between beta and risk premium which seems to increase for smaller companies. French, Schwert, and Stambaught in December 1986, examined the relation between stock returns and stock market volatility. They found the evidence that the expected market risk premium (the expected return on a stock portfolio minus the Treasury bill yield) is positively related to the predictable volatility of stock returns. There is also evidence that unexpected stock market returns are negatively related to the unexpected change in the volatility of stock returns. This negative relation provides indirect evidence of a positive relation between expected risk premiums and volatility.

Fama and French in June 1992, they looked empirically at the relationship among common stock return and a firm’s market capitalization (size), market- tobook-value ratio, and beta. They tested stock returns over the 1963-1990 period, they found that the size and market-to-book-value variables are powerful predictors of average stock returns. When these variables were used first in a regression analysis, the added beta variable was found to have little additional explanatory power. They suggested that the firm’s market value and market- to-

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

14

book-value ratio are the appropriate proxies for risk, and also suggested that beta is reasonable measure for risk.

Vaihekoshi has undertaken the study in 1996. Equity and government bond indexes as risk factors have been used in this research paper. The approach allows

for

the

time-varying

risk-premium,

risk-adjusted

returns,

risk

sensitivities, and residual variances. Betas, risk-adjusted returns, and residual variances are allowed to vary linearly with the conditioning information variables: a short-term interest rate level, a measure of interest rate volatility, a measure of interest rate term structure, a measure of currency market volatility. Tests are done using weekly returns on seven size, industry and leverage ranked portfolios. The sample period is 1987 to 1995. The results show some evidence that the bond factor is relevant to the pricing of the stocks. The results also support the idea that the conditioning variables can be used to predict the timevariation in betas.

This study has been done by Steven in June 2000, stated that the emerging stock markets represent an alternative investment opportunity for investors looking to diversify their portfolio. These markets have the potential to yield high returns, but do so at a high risk. This paper analyzes the performance of selected emerging stock markets last five years, relative to the performance of the S&P 500 standard index. The emerging markets analyzed are China, Pakistan, South Africa, Egypt, Hungary, Czech Republic, and Argentina, as represented by the MSCI index for each individual national market. These Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

markets

provide

a

cross

section

of

the

global

emerging

15

marketplace,

representing Asia, Africa, Eastern Europe, and Latin America. The risks, returns, and correlations of each of these markets are compared against the US market, and Jensen values are calculated to determine if they outperform the S&P 500. This data should help investors in achieving the goal of international asset allocation.

This paper has been done by Ahmet , Nusret in 1999. In this paper they test the overreaction hypothesis in seven industrialized countries using the methodology suggested by Conrad and Kaul. They then try to determine whether price or size is significant in explaining holding period to determine whether price or size is significant in explaining holding period returns to loser and winner portfolios. Finally, they evaluate the performance of arbitrage portfolios based on price and size, and compare the findings to the performance of loserwinner arbitrage portfolios. Moreover, two points must be considered in interpreting these findings; first, as Loughran and Ritter (1996) observed when portfolios are formed on a single variable like past returns, price or size, the impact of any of these variables will probably be overstated. Secondly, the returns to some portfolios might be accounted, at least in part, by higher risk.

This study has been carried out by Donald and Fisher. The purpose of this study is to investigate the price behavior of unseasoned new issues of common stock immediately following the offering and over the subsequent year during the period 1969-70. It widely alleged that under writers may attempt to “under Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

16

price” new issues of common stock so that the initial offering will be fully subscribed and rise in price subsequent to issue. The difference between offering price and subsequent market price constitute a “rent” that is distributed by the underwriter to initial purchase of the stock. It is hypothesized that this rent. In this study a number of hypotheses, based on the efficient market model, were tested with data on 142 unseasoned new issues of common stock offered in the first quarter 1969. The findings indicated significantly large returns for the initial subscribers, adjusted for market effects, in the first week following the offering. Fama and French in June 1998 studied the return performance of all no financial firms traded on the NYSE, AMEX and NASDAQ over the period from 1962 to 1990. They found that the market value and book to market ratio were important predictors of average returns, and that the beta of the stock was not a significant predictor. It is important to stress that it is not possible to disprove the notion of an efficient market through empirical tests. The interpretation of these findings is that they are finding a more accurate representation of the risk premium. It is not unreasonable to suppose that small firms are more risky than large firms. In addition, Harris and Marston suggest that the book to market ratio can be considered as a composite indicator of the beta of the stock and of its expected growth. They argue that a firm will have a high book to market (i.e. strong value characteristics) for two reasons: because the firm is risky (high

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

17

beta) or because the firm has poor growth prospects. The statistical results, according to this view, are not telling us anything about the efficiency of the market; they are simply showing us a methodology for more accurately estimating the risk factors. This study has been done by David and Shiller, in 1990, express that the excess volatility is an accepted phenomenon and cannot be adequately explained by fluctuations in real interest rates. In this essay the author has shown that it is more likely that capital gains or losses can be attributed to the actions of individual investors, rather than movements in ex-post values of which the ordinary investor would have very little knowledge. The author would postulate that the theory is only an extreme of certain limited markets. While it does hold to a certain extent in all markets, it is not the full explanation. The excess volatility which has been examined has been adequately explained by the theory of popular models, seems to be totally logical in its assumptions and is well supported by several texts as the author has demonstrated. For this reason one's answer to the question posed by this essay 'Stock Market Volatility Psychological Phenomenon?' would be that volatility is a function of both economic variables and psychological factors. The assumption though that the economic variables should be concentrated on to the detriment of research on psychological factors. William in May-June 1990, describe in their study that, Investors, regulators, brokers, dealers, and the press have all expressed concern over the

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

18

level of stock market volatility. But the perception that prices move a lot -- and have been moving a lot more in recent years, is in part merely a reflection of the historically high levels of popular indexes. The drop in stock prices on October 13, 1989, while large in terms of a point decline -- was not even among the 25 worst days in NYSE history in terms of percentage changes. While a 6 per cent drop in prices is not inconsequential, neither is it a rare event when considered within the context of the behavior of stock returns over the 1802-1989 periods. Apart from October 1987 and October 1989, volatility was not particularly high in the 1980s. Moreover, the growth in stock index futures and options trading has not been associated with an upward trend in stock volatility. There is little evidence that computerized trading per se increases volatility, except perhaps within the trading day. The evidence so far is inconclusive as to whether trading halts or circuit-breakers can reduce volatility in a beneficial way. Even if circuit- breakers can reduce volatility, are the benefits of stability greater than the cost of inefficiency created by the trading halt? 2.2

PAKISTANI EQUITY MARKET In the Pakistan, following studies and researches has been done by the

researchers to analyze and elaborate the stock market behavior.

Study has been done by Hussain and Uppal 1998, examined the distributional characteristics of Pakistani equity market as well as the effects of the opening of market to international investors. Using daily data on 36 companies, 8 section indices, and the market index Jan 1, 1989 to Dec 30, 1993 Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

19

various prepositions regarding stock return behavior was examined. The analysis shows significant returns in the market and that stock returns in the Pakistani market cannot be characterized by normal distribution. The study suggested that both the average return and volatility increased significantly when the market was opened but after one year dropped back.

In another study Hussain 1997, examined the day of the week effect in Pakistani equity market using the data as mentioned above. The results did not indicate any significant difference in stock returns across days. The analysis conducted in various sub periods revealed the presence of day of the week effect in the form of lowest returns on the first trading day. However, the paper indicates identical distribution of stock returns across days.

In another study Hussain 1997, examined relationship between retunes and stock market volatility for Pakistani equity market using daily data. The study also found a strong evidence of persistence in variance in returns, implying that shocks to volatility continue for a long period of time. When volatility was controlled, it was found that serial dependence in stock returns was reduced but not eliminates which indicated that the returns in the market may be partially predictable.

Khilji 1993 investigated the time series behavior of monthly stock returns in Pakistan over the period July 1981 to June 1992. The author made use of the state bank of Pakistan (SBP) share prices indices to calculate the monthly stock

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

20

returns for eleven groups of stocks. The findings of the research suggested that the distribution of the returns of various series were not normal and were generally, positively skewed, leptokurtic and had positive mean. Assuming that each industry group represented an efficient and diversified portfolio, historical betas were found to be statistically different from zero but not different form one. This means that investors in Pakistan sock market who have diversified portfolios of stock of different industries were subject to the same amount of risk as investors with one industry portfolio.

According to Ahmad and Rosser erratic and complex dynamics of the stock market suggests that Pakistani economy may be subject to instabilities and oscillations. On the other hand, rising but volatile market prices also reflect optimism regarding future economic development.

In a firm level study Farid and Ashraf 1995, analyzed the effects of trading volume on the volatility of stock prices has been studied by using average daily turnover of ten randomly selected companies for the first six months of 1994. Volatility of stock prices was found to be quite high ranging from a minimum of 26% per annum to 51% per annum. There was a strong positive correlation among the volume of trading, expected rate of return and volatility of stock prices during the first half of 1994 indicating the trend at the DSE to invest in stocks only for short term gains. It was observed in the study that majority of investors entered the market when it was rising and abandoned when it was falling, thus following their own portfolio insurance schemes. The Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

21

author also suggested a more detailed study on the basis of daily fluctuation of stock prices to get more accurate results.

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

22

CHAPTER # 3

RESEARCH METHODOLOGY AND DESIGN TYPE OF THE STUDY

The present study was an analytical research paper. The impacts of Risk on the return have estimated as an analytical aspect of the study. The relationship between risk and return has been analyzed in this research paper. This research paper used to analyze that how stock volatility affects the stock return.

3.2

SOURCES AND TYPE OF DATA

The importance of the data in economic research is an integral part of the building block of research. To reach an accurate and reliable source, searching for most relevant form of the data is a basic part of a research work. The analytical view of the data and their understanding can help in reaching concrete results. Most of reliable monthly data have been taken of last five years of Karachi stock exchange.

Usually it is observed that new researchers face difficulties in the source of data for longer time series. So a maximum care has been made to elaborate the data, its nature and source in an explicit way to help the researchers. Therefore, monthly data of last five years has been used in this regard.

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

23

For present study, the research has conducted on the basis of secondary data. There are various sources of data, which provide information on the stock prices and their risks and returns. Although the primary sources of the data are, local libraries, Annual reports, and the internet. It includes books, journals, newspapers, and various web sites. It has been found that internet is very useful source of valuable information that has been used in this study.

The main focus is on risk and return that will be appropriate to take start from these variables. Information on these variables is almost available in the entire above-mentioned data sources.

3.3 .

STATISTICAL TOOLS In this research paper there are two type of analysis have been carried out.

Firstly standard deviation has been calculated, in order to get total risk of top five selected companies on the basis of monthly data of last five years. Secondly, capital asset pricing model has been used for analysis. Measure of volatility is beta. Therefore, beta indicates that how much uncertainty and volatility exist in the market. The Capital Asset Pricing Model is one of the best known methods for quantifying risk.

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

24

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

25

CHAPTER # 4 ANALYSIS AND INTERPRETATION OF DATA

Table 4.1:

CALCULATION OF MEAN AND STANDAD DEVIATION

1) PAKISTAN TELE COMUNICATION COMPANY LIMITED (PTCL) YEAR 1998 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 18.00 19.05 19.45 18.75 18.20 17.65 19.45 21.00 23.85 24.45 24.75 22.55

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(1.50) 1.05 0.40 (0.70) (0.55) (0.55) 1.80 1.55 2.85 0.60 0.30 (2.20)

0.4625 0.4625 0.4625 0.4625 0.4625 0.4625 0.4625 0.4625 0.4625 0.4625 0.4625 0.4625 5.55

(5.32) 8.40 4.53 (1.22) (0.47) (0.48) 12.82 10.35 15.77 4.45 3.12 (7.02) 44.93

PRICES PER SHARE IN RS. 18.10 17.75 18.60 20.45

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(0.95) (0.35) 0.85 1.85

0.617 0.617 0.617 0.617

(1.75) 1.48 8.26 13.26

(9.06) 4.66 0.79 (4.96) (4.21) (4.22) 9.08 6.61 12.03 0.71 (0.62) (10.76)

82.08 21.71 0.6241 24.60 17.72 17.81 82.45 43.69 144.72 0.5041 0.3844 115.78 552.07

(5.92) (2.69) 4.09 9.09

35.05 7.24 16.73 82.63

YEAR 1999 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

22.10 19.85 23.10 21.00 21.10 19.90 20.65 21.70

1.65 (2.25) 3.25 (2.10) 0.10 (1.20) 0.75 1.05

0.617 0.617 0.617 0.617 0.617 0.617 0.617 0.617 7.40

11.09 (7.39) 19.48 (6.42) 3.41 (2.76) 6.87 8.07 50.00

PRICES PER SHARE IN RS. 25.65 28.10 30.85 29.90 28.25 27.85 27.80 26.60 26.80 25.90 24.70 23.90

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

3.95 2.45 2.75 (0.95) (1.65) (0.40) (0.05) (1.20) 0.20 (0.90) (1.20) (0.80)

0.6875 0.6875 0.6875 0.6875 0.6875 0.6875 0.6875 0.6875 0.6875 0.6875 0.6875 0.6875 8.250

21.37 12.23 12.23 (0.8509) (3.22) 1.02 2.29 (1.84) 3.34 (0.7929) (1.98) (0.4555) 43.34

PRICES PER SHARE IN RS. 25.30 24.30 22.75 22.90 23.00 22.75 21.00 20.75

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(1.40) (1.00) (1.55) 0.15 0.10 (0.25) (1.75) (0.25)

0.7625 0.7625 0.7625 0.7625 0.7625 0.7625 0.7625 0.7625

(2.66) (0.9387) (3.24) 4.01 3.77 2.23 (4.34) 2.44

26

6.92 (11.56) 15.31 (10.59) (0.76) (6.93) 2.70 3.90

47.89 133.63 234.40 112.15 0.5776 48.02 7.29 15.21 740.82

17.76 8.62 8.62 (4.46) (6.83) (2.59) (1.32) (5.42) (0.27) (4.40) (5.59) (4.07)

315.42 74.30 74.30 19.90 46.65 6.71 1.74 29.70 0.0729 19.39 31.25 16.53 635.96

(5.49) (3.77) (6.07) 1.18 0.94 (0.60) (7.17) (0.39)

30.14 14.20 36.54 1.39 0.8836 0.36 51.41 0.1521

YEAR 2000 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

YEAR 2001 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

19.55 19.80 21.55 23.40

(1.20) 1.25 1.75 1.85

0.7625 0.7625 0.7625 0.7625 9.15

(2.11) 10.29 12.69 12.12 33.96

PRICES PER SHARE IN RS. 15.60 17.55 18.95 19.15 15.45 17.15 18.75 20.15 17.25 19.80 21.25 18.50

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

7.80 1.95 1.40 0.20 (3.70) 1.70 1.60 1.40 (2.90) 2.55 1.45 (2.75)

0.8292 0.8292 0.8292 0.8292 0.8292 0.8292 0.8292 0.8292 0.8292 0.8292 0.8292 0.8292 9.95

36.88 17.81 12.70 5.42 (14.99) 16.37 14.16 11.89 (10.28) 19.59 11.51 (9.04) 112.02

27

(4.94) 7.46 9.86 9.29

24.40 55.65 97.23 86.30 398.66

27.55 8.48 3.37 (3.91) (24.32) 7.04 4.83 2.56 (19.61) 10.26 2.18 (18.37)

759.00 71.91 11.36 15.29 591.46 49.56 23.33 6.55 384.55 105.27 4.75 337.46 2360.49

YEAR 2002 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

28

INTERPRETATION

Risk is calculated on the basis of fluctuations. Risk can not be eliminated at all. It can be minimized but can’t be eliminate entirely. Risk can be diverge both the sides positive or negative. If the difference between average (mean) and standard deviation is less, therefore it must be less risky investment, and if the difference between average (mean) and standard deviation is high than it indicates that it must be very risky investment. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data is, the higher the deviation. A volatile stock would have a high standard deviation. Standard deviation can also be calculated as the square root of the variance. Whatever way TSR is calculated, it means the same thing - the total amount returned to investors.

In year 1998, PTCL total risk is 7.08 and total return is 44.93. It indicates that there is either +7.08% or -7.08% deviation is possible. If this share has been purchased for Rs. 22.50 and there is risk of 7.08%. than this share can be for Rs. 24.09, if there is +7.08%, and if there is -7.08% than this share can be for Rs. 20.91. In year 1999, PTCL total risk is 8.21% while its total return is 50.00%. It indicates that the price of this share can be deviate either +8.21% or -8.21%. In year 2000, PTCL total risk is 7.60% and its total return is 43.34%. It shows that price of this share can be deviate +7.60% or -7.60%. In year 2001, its total risk is 6.02%, while total return is 33.96%. The price of this share can be deviate either +6.02% or -6.02%. . In year 2002, PTCL total risk is 14.65% while its Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

29

total return is 112.02%. It indicates that the price of this share can be deviate either +14.65% or -14.65%. If there is high risk there are high chances of deviation and if there is low risk than there are lesser chances

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

30

of deviation. In year 2002, there is high risk as 14.65%. Therefore, there is high chance of deviation as well. This deviation can be either +14.65% or-14.65%.

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Table 4.2:

31

CALCULATION OF MEAN AND STANDAD DEVIATION 2) PAKISTAN STATE OIL COMPANY LIMITED (PSO) YEAR 1998

MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 78.00 78.25 77.95 77.40 76.00 76.25 82.50 78.95 94.40 54.90 83.90 78.00

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

1.45 0.25 (0.30) 0.55 (1.40) 0.25 6.25 (3.55) 15.45 (39.50) 29.00 (5.90)

1.6784 1.6784 1.6784 1.6784 1.6784 1.6784 1.6784 1.6784 1.6784 1.6784 1.6784 1.6784 20.14

4.09 2.47 1.76 2.86 0.3597 2.54 10.40 (2.27) 21.70 (40.07) 55.88 (5.03) 54.69

PRICES PER SHARE IN RS. 60.75 66.70 84.60 89.25 105.90 92.50 136.35 125.00 134.50 137.55 141.70

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(17.25) 5.95 17.90 4.65 16.65 (13.40) 43.85 (11.35) 9.50 3.05 4.15

2.083 2.083 2.083 2.083 2.083 2.083 2.083 2.083 2.083 2.083 2.083

(19.45) 13.22 29.96 7.96 20.99 (10.69) 49.66 (6.80) 9.27 3.82 4.53

(0.47) (2.09) (2.80) (1.70) (4.20) (2.02) 5.84 (6.83) 17.14 (44.63) 51.32 (9.59)

0.2209 4.37 7.84 2.89 17.64 4.08 34.11 46.65 293.78 1991.84 2633.74 91.97 5129.13

(31.19) 1.48 18.22 (3.78) 9.25 (22.43) 37.92 (18.54) (2.47) (7.92) (7.21)

972.82 2.19 331.97 14.29 85.56 503.10 1437.93 343.73 6.10 62.73 51.98

YEAR 1999 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Dec 1st to Dec 31st SUB TOTAL

194.00

52.30

2.083 25.00

38.38 140.85

PRICES PER SHARE IN RS. 151.50 155.50 154.60 136.25 135.15 141.44 142.26 150.45 155.26 165.94 168.22 164.10

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(39.50) 4.00 (0.90) (18.35) (1.10) 6.29 0.82 8.19 4.81 10.68 2.28 (4.12)

2.792 2.792 2.792 2.792 2.792 2.792 2.792 2.792 2.792 2.792 2.792 2.792 33.50

(18.92) 4.48 1.22 (10.06) 1.24 6.72 2.55 7.72 5.05 8.68 3.06 (0.7896) 10.95

PRICES PER SHARE IN RS. 144.75 142.25 144.25 141.65 142.45 132.50 123.55 127.85 105.60 111.60 117.60 130.40

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(19.35) 2.50 2.00 (2.60) 0.80 (9.95) (8.95) 4.30 (22.25) 6.00 12.80 6.40

3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 42.00

(9.66) 4.15 3.87 0.6239 3.04 (4.53) (4.11) 6.31 (14.67) 9.00 14.61 8.42 17.05

32

26.64

709.69 4522.09

(19.83) 3.57 0.3075 (10.97) 0.3275 5.81 1.64 6.81 4.14 7.77 2.15 (1.70)

393.33 12.73 0.0946 120.40 0.1073 33.73 2.68 46.34 17.12 59.56 4.61 2.90 693.60

(11.08) 2.73 2.45 (0.7961) 1.62 (5.95) (5.53) 4.89 (16.09) 7.58 13.19 7.00

122.77 7.45 6.00 0.6338 2.62 35.40 30.58 23.91 258.89 57.46 173.98 49.00 768.69

YEAR 2000 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

YEAR 2001 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

YEAR 2002 Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 125.00 138.50 147.15 154.15 148.85 140.00 140.80 202.65 197.30 195.50 176.35 211.50

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(5.40) 13.50 8.65 7.00 (5.30) (8.85) 0.80 61.85 (5.35) (1.80) (19.15) 35.15

3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 45.00

(1.26) 13.80 8.95 7.31 (1.01) (3.43) 3.25 46.59 (0.7895) 0.9883 (7.88) 22.06 88.58

(8.64) 6.42 1.57 (0.07) (8.39) (10.81) (4.13) 39.21 (8.17) (6.39) (15.26) 14.68

33

74.65 41.22 2.46 0.0049 70.39 116.86 17.06 1537.42 66.74 40.85 232.87 215.50 2416.02

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

34

INTERPRETATION

In year 1998, PSO total risk is 21.59% while its total return is 54.69%. It indicated that there is possibility of deviation in price is either +21.59% or -21.59%. For instance this share has been purchased for Rs. 78.00. This share can be for Rs. 94.84, if there is +21.59% variation. This share can be also for Rs. 61.16, if there is -21.59% divergences. In year 1999, its total risk is 20.28% and total return is 140.85%. It shows that there is a possibility of deviation in price. This deviation may +20.28% or -20.28%. In year 2000, PSO total risk is 7.94% while its total return is 10.95%. It indicates that the price of this share can be deviate either +7.94% or -7.94%. In year 2001, its total risk is 8.36% and its total return is 17.05%. 8.36% indicates that the price of this share can be deviate either +8.36% or -8.36%. In year 2002, PSO total risk is 14.82% while its total return is 88.58%. It indicates that there is possibility of deviation in price either +14.82% or -14.82%. ………………………………………………….

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Table 4.3:

35

CALCULATION OF MEAN AND STANDAD DEVIATION 3) ENGRO CHEMICAL PAKISTAN LIMITED YEAR 1998

MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 56.80 50.44 52.07 50.46 54.32 59.75 65.90 66.25 59.60 51.30 69.90 89.95

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(3.52) (6.36) 1.63 (1.61) 3.86 5.43 6.15 0.35 (6.65) (8.30) 18.60 20.05

2.0322 2.0322 2.0322 2.0322 2.0322 2.0322 2.0322 2.0322 2.0322 2.0322 2.0322 2.0322 24.386

(2.47) (7.62) 7.26 0.8108 11.68 13.74 13.69 3.61 (6.97) (10.52) 40.22 31.59 95.02

PRICES PER SHARE IN RS. 88.00 88.35 90.00 84.40 76.10 72.50 74.55

CAPITAL GAIN / (LOSS)

DIVIDEND PER SHARE IN RS. 1.7842 1.7842 1.7842 1.7842 1.7842 1.7842 1.7842

(10.39) (15.54) (0.66) (7.12) 3.76 5.82 5.77 (4.31) (14.89) (18.44) 32.30 23.67

107.95 241.49 0.4356 50.54 14.14 33.87 33.29 18.58 221.71 340.03 1043.29 560.27 2665.60

(1.48) 1.13 2.59 (5.54) (9.02) (3.69) 3.99

2.20 1.28 6.71 30.69 81.36 13.62 15.92

YEAR 1999 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st

(1.95) 0.35 1.65 (5.60) (8.30) (3.60) 2.05

TOTAL RETURN IN %ages (0.1843) 2.43 3.89 (4.24) (7.72) (2.39) 5.29

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

76.89 76.99 78.74 79.25 79.92

2.34 0.10 1.75 0.51 0.67

1.7842 1.7842 1.7842 1.7842 1.7842 21.41

5.53 2.45 4.59 2.91 3.10 15.66

PRICES PER SHARE IN RS. 69.95 74.44 78.29 76.99 79.44 78.65 77.10 77.25 77.80 78.75 78.85 79.00

CAPITAL GAIN / (LOSS)

DIVIDEND PER SHARE IN RS. 1.36 1.36 1.36 1.36 1.36 1.36 1.36 1.36 1.36 1.36 1.36 1.36 16.32

PRICES PER SHARE IN RS. 77.75 63.60 57.60 61.65 67.55 67.05 59.75 63.95 65.90 66.05 65.20

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(1.25) (4.15) (6.00) 4.05 5.90 (0.50) (7.30) 4.20 1.95 0.15 (0.85)

2.16 2.16 2.16 2.16 2.16 2.16 2.16 2.16 2.16 2.16 2.16

1.15 (2.56) (6.04) 10.78 13.07 2.46 (7.66) 10.64 6.43 3.51 1.98

36

4.23 1.15 3.29 1.61 1.80

17.89 1.32 10.82 2.59 3.24 187.64

(12.54) 6.59 5.23 (1.69) 3.18 (1.05) (2.01) 0.19 0.70 1.20 0.08 0.15

157.25 43.43 27.35 2.87 10.11 1.11 4.05 0.0361 0.49 1.44 0.0064 0.0225 248.17

(1.63) (5.34) (8.82) 8.00 10.29 (0.32) (10.44) 7.86 3.65 0.73 (0.80)

2.66 28.51 77.79 64.00 105.88 0.1024 108.99 61.78 13.32 0.5329 0.64

YEAR 2000 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

(9.97) 4.49 3.85 (1.30) 2.45 (0.79) (1.55) 0.15 0.55 0.95 0.10 0.15

TOTAL RETURN IN %ages (10.77) 8.36 7.00 0.07664 4.95 0.7175 (0.2416) 1.96 2.47 2.97 1.85 1.92 21.26

YEAR 2001 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Dec 1st to Dec 31st SUB TOTAL

62.75

(2.45)

2.16 25.92

(0.4448) 33.32

37

(3.22)

(10.40) 453.80

(8.04) 21.48 (0.17) (22.66) (23.06) 10.52 4.13 (5.79) (4.97) 6.86 (1.22) 22.87

64.68 461.39 0.0289 513.48 531.76 110.67 17.06 33.52 24.70 47.06 1.49 523.04 2328.88

YEAR 2002 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 60.25 75.55 78.95 64.85 52.60 59.90 64.70 63.65 63.10 70.00 72.25 92.05

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(2.50) 15.30 3.40 (14.10) (12.25) 7.30 4.80 (1.05) (0.55) 6.90 2.25 19.80

2.2725 2.2725 2.2725 2.2725 2.2725 2.2725 2.2725 2.2725 2.2725 2.2725 2.2725 2.2725 27.27

(0.3625) 29.16 7.51 (14.98) (15.38) 18.20 11.81 1.89 2.71 14.54 6.46 30.55 92.12

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

38

INTERPRETATION

In 1998, Engro Chemical’s total risk is 15.57% while its total return is 95.02%. It indicates that the price of this share can be deviate either +15.57% or -15.57%. If this share has been purchased for Rs. 89.95, and there is possibility of +15.57% than the price of this share can be Rs. 103.96 and if there is possibility of -15.57% than the price of this share can be Rs. 75.94. In year 1999, Engro Chemical’s total risk is 4.13% while its total return is 15.66%. It indicates that the price of this share can be deviate either +4.13% or -4.13%. In year 2000, Engro Chemical’s total risk is 4.75% and its total return is 21.26%. It shows that price of this share can be deviate +4.75% or -4.75%. In year 1999 and 2000 Engro chemical’s total risks are very low therefore; there are the possibilities of low deviations, as the risks are very low in both the years. In year 2001, its total risk is 6.42% while its total return is 33.32%. The price of this share can be deviate either +6.42% or -6.42%. In year 2002, Engro Chemical’s total risk is 14.55% while its total return is 92.12%. It indicates that there is possibility of deviation in price either +14.55% or -14.55%. In year 2002, standard deviation is high as 14.55%, therefore there is high chance of variation either it is positive or negative. ……………………………………………

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Table 4.4:

39

CALCULATION OF MEAN AND STANDAD DEVIATION 4) MUSLIM COMMERCIAL BANK LIMITED (MCB) YEAR 1998

MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 12.75 15.00 16.25 17.05 17.60 18.60 16.40 17.75 20.65 18.10 19.10 17.05

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(1.70) 2.25 1.25 0.80 0.55 1.00 (2.20) 1.35 2.90 (2.25) 1.00 (3.00)

0.08658 0.08658 0.08658 0.08658 0.08658 0.08658 0.08658 0.08658 0.08658 0.08658 0.08658 0.08658 1.039

(11.17) 18.33 8.91 5.46 3.73 6.17 (11.36) 8.76 16.83 (10.48) 6.00 (15.25) 25.93

PRICES PER SHARE IN RS. 16.60 18.45 22.50 23.40 21.07 22.45 24.50 23.45 20.50 21.25

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(0.45) 1.85 3.80 0.40 (2.28) 1.38 (2.05) (1.05) (2.95) (0.75)

0.334 0.334 0.334 0.334 0.334 0.334 0.334 0.334 0.334 0.334

(0.6804) 13.16 22.41 3.26 (8.32) 8.13 (7.64) (2.92) (11.16) (2.03)

(13.33) 16.17 6.75 3.30 1.57 4.01 (13.52) 6.60 14.67 (12.64) 3.84 (17.41)

177.69 261.49 45.56 10.89 2.46 16.08 182.79 43.96 215.21 159.77 14.75 303.11 1433.76

(2.96) 10.88 20.13 0.98 (10.60) 5.85 (9.92) (5.20) (13.44) (4.31)

8.76 118.37 405.23 0.9604 112.36 34.22 98.41 27.04 180.63 18.58

YEAR 1999 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

24.40 23.28

3.15 (1.12)

0.334 0.334 4.008

16.40 (3.22) 27.39

40

14.12 (5.50)

199.37 30.25 1234.18

(7.26) (0.48) (16.25) (10.48) 9.21 3.11 7.69 1.54 8.22 12.53 (29.61) 21.78

52.71 0.2304 264.06 109.83 84.82 9.67 59.14 2.37 67.57 157.00 876.75 474.37 2158.52

(4.56) (11.76) (18.97) 12.97 (3.32) 6.14 (14.16) 7.66 6.98 14.36 7.08 (11.37)

20.79 139.24 359.86 168.22 11.00 37.70 200.50 58.67 48.72 206.21 50.13 129.28 1430.23

YEAR 2000 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 22.45 23.16 20.25 18.84 21.22 22.64 25.21 26.55 29.75 34.65 25.80 32.40

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(0.83) 0.71 (2.91) (1.41) 2.38 1.42 2.57 1.34 3.20 4.90 (8.85) 6.60

0.2677 0.2677 0.2677 0.2677 0.2677 0.2677 0.2677 0.2677 0.2677 0.2677 0.2677 0.2677 3.212

(2.42) 4.36 (11.41) (5.64) 14.05 7.95 12.53 6.38 13.06 17.37 (24.77) 26.62 58.08

PRICES PER SHARE IN RS. 31.50 28.35 23.45 26.85 26.40 28.45 24.90 27.20 29.55 34.30 37.35 33.80

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(0.90) (3.15) (4.90) 3.40 (0.45) 2.05 (3.55) 2.30 2.35 4.75 3.05 (3.55)

0.2171 0.2171 0.2171 0.2171 0.2171 0.2171 0.2171 0.2171 0.2171 0.2171 0.2171 0.2171 2.605

(2.11) (9.31) (16.52) 15.42 (0.8674) 8.59 (11.71) 10.11 9.43 16.81 9.53 (8.92) 29.37

YEAR 2001 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

YEAR 2002 Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 25.80 27.32 24.05 23.25 24.40 29.10 23.90 25.35 27.10 32.75 33.05 29.00

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

7.00 1.52 (3.27) (0.80) 1.15 4.70 (5.20) 1.45 1.75 5.65 0.33 (4.05)

0.4282 0.4282 0.4282 0.4282 0.4282 0.4282 0.4282 0.4282 0.4282 0.4282 0.4282 0.4282 5.138

39.51 7.55 (10.40) (1.55) 6.79 21.02 (16.40) 7.86 8.59 22.43 2.32 (10.96) 76.76

33.11 1.15 (16.80) (7.95) 0.39 14.62 (22.80) 1.46 2.19 16.03 (4.08) (17.36)

41

1096.27 1.32 282.24 63.20 0.1521 213.74 519.84 2.13 4.80 256.96 16.65 301.37 2758.67

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

42

INTERPRETATION

In year 1998, MCB total risk is 11.42% and total return is 25.93%. It indicates that there is either +11.42% or -11.42% deviation is possible. If this share has been purchased for Rs. 17.05 and there is risk of 11.42%. Than this share can be for Rs. 19.00, if there is possibility of +11.42% variation, and if there is possibility of -11.42% deviation, than this share can be for Rs. 15.10. In year 1999, MCB total risk is 10.59% while its total return is 27.39%. It indicates that the price of this share can be deviate either +10.59% or -10.59%. In year 2000, MCB total risk is 14.01% and its total return is 58.08%. It shows that the price of this share can be deviate +14.01% or -14.01%. In year 2001, its total risk is 11.40% while its total return is 29.37%. The price of this share can be deviate either +11.40% or -11.40%. In year 2002, MCB total risk is 15.84% while its total return is 76.76%. It indicates that the price of this share can be deviate either +15.84% or -15.84%. If there is high risk there are high chances of deviation and if there is low risk than there are lesser chances of deviation. In year 2002, there is high risk as 15.84%. Therefore, there is high chance of deviation as well. This deviation can be either positive or negative.

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Table 4.5:

43

CALCULATION OF MEAN AND STANDAD DEVIATION 5) FAUJI FERTILIZER COMPANY YEAR 1998

MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 40.25 42.95 45.70 52.22 54.15 51.50 46.20 51.25 50.55 34.30 51.85 45.80

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(0.25) 2.70 2.75 6.52 1.93 (2.65) (5.30) 5.05 (0.70) (16.25) 17.55 (6.05)

2.6812 2.6812 2.6812 2.6812 2.6812 2.6812 2.6812 2.6812 2.6812 2.6812 2.6812 2.6812 32.17

6.00 13.37 12.65 20.13 8.83 0.0576 (5.09) 16.73 3.87 (26.84) 58.98 (6.50) 102.19

PRICES PER SHARE IN RS. 41.10 44.25 55.55 53.55 51.40 40.75 49.25 51.30 45.80 46.00

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

(4.70) 3.15 11.30 (2.00) (2.15) (10.65) 8.50 2.05 (5.50) 0.20

2.3117 2.3117 2.3117 2.3117 2.3117 2.3117 2.3117 2.3117 2.3117 2.3117

(5.21) 13.29 30.76 0.5611 0.3020 (16.22) 26.53 8.86 (6.22) 5.48

(2.52) 4.85 4.13 11.61 0.31 (8.46) (13.61) 8.21 (4.65) (35.36) 50.46 (15.02)

6.35 23.52 17.07 134.79 0.0961 71.61 185.23 67.40 21.62 1250.33 2546.21 225.60 4549.82

(12.15) 6.35 23.82 (6.38) (6.64) (23.16) 19.59 1.92 (13.16) (1.46)

147.62 40.32 567.39 40.69 44.06 536.39 383.77 3.69 173.19 2.13

YEAR 1999 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

47.45 53.20

1.45 5.75

2.3117 2.3117 27.74

8.18 16.99 83.31

44

1.24 10.05

1.54 101.00 2041.79

26.12 (3.73) 0.11 (5.07) 4.53 (7.02) (6.03) 4.43 5.99 3.07 1.91 (24.26)

682.25 13.91 0.0121 25.70 20.52 49.28 36.36 19.62 35.88 9.42 3.65 588.55 1485.15

17.33 (15.50) (5.90) 4.72 1.35 (18.70) (1.70) 4.97 (12.49) 28.57 (2.96) 0.35

300.33 240.25 34.81 22.28 1.82 349.69 2.89 24.70 156.00 816.24 8.76 0.1225 1957.89

YEAR 2000 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 66.10 63.00 62.35 58.45 60.25 55.22 50.95 52.15 54.25 54.95 55.05 40.75

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

12.90 (3.10) (0.65) (3.90) 1.80 (5.03) (4.27) 1.20 2.10 0.70 0.10 (14.30)

2.4858 2.4858 2.4858 2.4858 2.4858 2.4858 2.4858 2.4858 2.4858 2.4858 2.4858 2.4858 29.83

28.92 (0.9292) 2.91 (2.27) 7.33 (4.22) (3.23) 7.23 8.79 5.87 4.71 (21.46) 33.65

PRICES PER SHARE IN RS. 48.20 41.85 39.85 42.05 43.10 35.60 35.00 36.70 32.20 41.15 40.35 40.85

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

7.45 (6.35) (2.00) 2.20 1.05 (7.50) (0.60) 1.70 (4.50) 8.95 (0.80) 0.50

2.645 2.645 2.645 2.645 2.645 2.645 2.645 2.645 2.645 2.645 2.645 2.645 31.74

24.77 (8.06) 1.54 12.16 8.79 (11.26) 5.74 12.41 (5.05) 36.01 4.48 7.79 89.32

YEAR 2001 MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

YEAR 2002 Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

MONTHS Jan 1st to Jan 31st Feb 1st to Feb 28th Mar 1st to Mar 31st Apr 1st to Apr 30th May 1st to May 31st Jun 1st to Jun 30th July 1st to July 31st Aug 1st to Aug 30th Sep 1st to Sep 30th Oct 1st to Oct 31st Nov 1st to Nov 30th Dec 1st to Dec 31st SUB TOTAL

PRICES PER SHARE IN RS. 49.50 49.65 40.25 43.50 45.77 50.40 52.35 43.95 49.75 47.85 51.40 63.10

CAPITAL GAIN / (LOSS)

DIVIDEND

TOTAL RETURN IN %ages

8.65 0.15 (9.40) 3.25 2.27 (4.63) 1.95 (8.40) 5.80 (1.90) 3.55 11.70

2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 30.00

27.29 5.35 (13.90) 14.29 10.97 (4.65) 8.83 (11.27) 18.89 1.21 12.64 27.63 97.28

199.18 (2.76) (22.01) 6.18 2.86 (12.76) 0.72 (19.38) 10.78 (6.90) 4.53 19.52

45

367.87 7.62 484.44 38.19 8.18 162.82 0.5184 375.58 116.21 47.61 20.52 381.03 2010.59

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

46

INTERPRETATION In year 1998, Fauji fertilizer’s total risk is 20.34% and total return is 102.19%. It indicates that there is either +20.34% or –20.34% deviation is possible. If this share has been purchased for Rs. 45.80 and there is risk of 20.34%. than this share can be for Rs. 55.12, if there is a possibility of +20.34% , and if there is possibility of –20.34% than this share can be for Rs. 36.48. In year 1999, Fauji fertilizer’s total risk is 13.62% while its total return is 83.31%. It indicates that the price of this share can be deviate either +13.62% or – 13.62%. In year 2000, its total risk is 11.62% and its total return is 33.65%. It shows that the price of this share can be deviate +11.62% or –11.62%. In year 2001, its total risk is 13.34% while its total return is 89.32%. The price of this share can be deviate either +13.34% or –13.34%. In year 2002, Fauji fertilizer’s total risk is 13.52% while its total return is 97.28%. It indicates that there is possibility of deviation in price either +13.52% or –13.52%.

Under the light of above analysis it is concluded that risk can affect the stock prices in two ways, either it can be positive or negative. If there is positive affect than investor gets capital gain and, if there is negative affect than investor suffers capital loss. Risk is a chance. Therefore risk can be deviate both the sides either positive or negative. ………………………………………

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Table 4.6:

Years st Jan 1 to Dec 31st 1998 Jan 1st to Dec 31st 1999 Jan 1st to Dec 31st 2000 Jan 1st to Dec 31st 2001 Jan 1st to Dec 31st 2002 Years st Jan 1 to Dec 31st 1998 Jan 1st to Dec 31st 1999 Jan 1st to Dec 31st 2000 Jan 1st to Dec 31st 2001 Jan 1st to Dec 31st 2002 Years st Jan 1 to Dec 31st 1998 Jan 1st to Dec 31st 1999 Jan 1st to Dec 31st 2000 Jan 1st to Dec 31st 2001 Jan 1st to Dec 31st 2002 Years st Jan 1 to Dec 31st 1998 Jan 1st to Dec 31st 1999 Jan 1st to Dec 31st 2000 Jan 1st to Dec 31st 2001 Jan 1st to Dec 31st 2002

ANALYSIS SUMMARY

1) PAKISTAN TELE COMUNICATION COMPANY LIMITED (PTCL) Total Return Total Risk 44.93 50.00 43.34 33.96 112.02

7.08 8.21 7.60 6.02 14.65

2) PAKISTAN STATE OIL COMPANY LIMITED (PSO) Total Return Total Risk 54.69 140.85 10.95 17.05 88.58

21.59 20.28 7.94 8.36 14.82

3) ENGRO CHEMICAL PAKISTAN LIMITED Total Return Total Risk 95.02 15.66 21.26 33.32 92.12

15.57 4.13 4.75 6.42 14.55

4) MUSLIM COMMERCIAL BANK LIMITED (MCB) Total Return Total Risk 25.93 27.39 58.08 29.37 76.76

47

11.42 10.59 14.01 11.40 15.84

Mean 3.74 4.17 3.61 2.83 9.34 Mean 4.56 11.74 0.9125 1.42 7.38 Mean 7.92 1.31 1.77 2.78 7.68 Mean 2.16 2.28 4.84 2.45 6.40

5) FAUJI FERTILIZER COMPANY Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Years Jan 1 to Dec 31st 1998 Jan 1st to Dec 31st 1999 Jan 1st to Dec 31st 2000 Jan 1st to Dec 31st 2001 Jan 1st to Dec 31st 2002 st

Total Return 102.19 83.31 33.65 89.32 97.28

Total Risk 20.34 13.62 11.62 13.34 13.52

48

Mean 8.52 6.94 2.80 7.44 8.11

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

Table 4.7:

Rf FF EC PSO PTCL MCB

15.10 15.10 15.10 15.10 15.10 Rf

FF PSO PTCL EC MCB

12.50 12.50 12.50 12.50 12.50 Rf

FF EC MCB PSO PTCL

8.80 8.80 8.80 8.80 8.80 Rf

MCB FF PTCL EC PSO

6.60 6.60 6.60 6.60 6.60 Rf

PTCL

8.00

49

CAPITAL ASSET PRICING MODEL (CAPM) Year 1998 Erm Beta 24.10 24.10 24.10 24.10 24.10

2.15 0.93 0.41 0.38 0.006

Year 1999 Erm Beta 21.50 21.50 21.50 21.50 21.50

1.88 1.46 0.27 0.075 0.012

Year 2000 Erm Beta 17.80 17.80 17.80 17.80 17.80

1.93 1.05 0.18 0.11 0.07

Year 2001 Erm Beta 15.60 15.60 15.60 15.60 15.60

2.00 1.80 1.55 0.92 0.62

Year 2002 Erm Beta 17.00

1.74

Ke 34.45 23.47 18.79 18.52 15.15 Ke 29.42 25.64 14.93 13.17 12.61 Ke 26.17 18.25 10.42 9.79 9.43 Ke 24.60 22.80 20.55 14.88 12.18 Ke 23.66

Type of Investment Very Aggressive Defensive Very Defensive Very Defensive Very Defensive Type of Investment Very Aggressive Aggressive Very Defensive Very Defensive Very Defensive Type of Investment Very Aggressive Aggressive Very Defensive Very Defensive Very Defensive Type of Investment Very Aggressive Very Aggressive Very Aggressive Defensive Defensive Type of Investment Very Aggressive Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

MCB FF PSO EC

8.00 8.00 8.00 8.00

17.00 17.00 17.00 17.00

1.28 0.99 0.95 0.10

19.52 16.91 16.55 8.90

50

Very Aggressive Defensive Defensive Very Defensive

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

51

Figure 4.1.1 Figure 4.1.2 Figure 4.1.3 Figure 4.1.4 Figure 4.1.5

Volatility and R eturn (Year 1998)

Volatility and Return (Year 1999) V olatility and R eturn (Year 2000) BetaVolatility Ke

and Return (2001) V olatility anBeta d R eturnKe (Year 2002)

1

0.5

0 FF

0 0.2 00 0

35 30

35

30 3025 25 25

30 25 20

Beta Beta Beta Beta

Beta

1.5

40

15

25 20 20 20 20

Expected Return

2

2 2.5 2.51.8 2 1.6 1.8 2 2 1.4 1.6 1.2 1.4 1.5 1.5 1 1.2 0.8 11 0.6 0.8 0.4 0.6 0.5 0.5 0.2 0.4

Ke Ke Ke

15 1515

10

10 1010 10

5

5 55 5

0 EC

FFFF MCB

P TCL

PSO Com pa nie s PSO EC FF

M CB

PTCL

PTCL M CB PTCL Companies Compa panie niess Com FF Com pa nie s

M CB

EC PEC SO PSO

Expected Return Expected Return Expected Return Expected Return

B eta Beta B eta

2.5

MCB P TCL PSO EC

Javed Mehboob (MBA) Final Research Report

00 0

0

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

52

INTERPRETATION The aggregate market has a beta of 1.0. More volatile (risky) stocks have betas larger than 1.0, and less volatile (risky) stocks have betas smaller than 1.0. As a relative measure of risk, beta is very convenient. Beta is useful for investors to judge a stock risk use comparing the relative systematic risk of different stocks. Beta is relevant measure of risk that cannot be diversified away in a portfolio of securities and, as such, is the measure that investors should consider in their portfolio management decision process.

If the Beta is 1.0, it means that excess returns for the stock vary proportionally with excess returns for the market portfolio. In other words, the stock has the same systematic risk as the market as whole. If the market goes up and provides an excess return of 5 percent for a month, we would expect, on average, the stock’s excess return to be 5 percent as well. More than 1.0 Beta indicates that stock’s excess return varies more than proportionally with the excess return of the market portfolio. Put another way, it has more unavoidable risk than the market as a whole. This type of stock is often called as aggressive investment. In this case securities return has been more volatile as market returns, both up and down. Greater the beta for a stock leads the greater its systematic risk. This means that for both upward and downward movements in market excess returns, movements in excess returns for the individual stocks are greater or less depending on its beta. This risk cannot be diversified away by

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

53

investing in more stocks, because it depends on such things as changes in the economy and in the political atmosphere, which affect all stocks or market.

If the Beta is less than 1.0, it means that the stock’s excess return varies less than proportionally with the excess return of the market portfolio. This type of stock is often called a defensive investment. In this case securities return has been less volatile as market returns. Beta less than 1.0 indicates that the expected return on stock will be less than the expected return on market portfolio.

If the Beta is equal to 1.0, in other words we can say that stock Beta is equal to market Beta. It means that the stock’s excess return is equal to the excess return of the market portfolio, where the expected return on stock will be equal to the expected return on the market portfolio. If the beta is more than 1.50, than this type of investment is called as very aggressive investment. If beta is more than 1.0 and less than 1.50, therefore this type of investment is called as aggressive investment. If stock beta is less than 1.00 and more than 0.50, therefore this type of investment is called as defensive investment. If stock beta is less than 0.50, therefore this type of investment is called as very defensive investment.

In market equilibrium, a security is supposed to provide and expected return commensurate with its systematic risk, the risk that cannot be avoided with diversification. The capital asset pricing model (CAMP) formally describes

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

54

the relationship between risk and return. In this research report there are five securities have been chosen for analysis. In a year 1998, Fauji fertilizer has the highest Beta of 2.15 among these five selected securities. It indicated that, on average, security return is 2.15 times more volatile as market returns. It is an aggressive or more volatile investment, because its Beta is greater than market Beta; therefore, the expected return on Fauji fertilizer is 34.45%, which is more than the expected return on the market portfolio, which is 24.10%. It indicates that investment in the Fauji fertilizer would be more volatile and be aggressive or more risky in nature, because its beta is more than the market Beta. In the same year Engro chemicals has the Beta of 0.93. Lesser the beta for a stock leads the lower its systematic risk. Therefore, Engro chemicals has the lesser systematic risk. This type of investment is called as defensive investment, because its Beta is less than the market Beta. Therefore its expected return is 23.47% and the expected return on the market is 24.10%. Engro chemicals beta is less than the beta of Fauji fertilizer, therefore its expected return is less than the expected return on Fauji fertilizers. Pakistan state oils company has the beta of 0.41 in year 1998; therefore, its expected return is 18.79%, which is less than the market return. It means that the PSO excess return varies less than proportionally with the excess return of the market portfolio. It is a defensive investment. In a year 1998, PTCL has the Beta of 0.38, which is less than the market Beta. Therefore, its expected return is less than the expected return on the market. PTCL expected return is 18.52% and it is less than the expected return on the market as 24.10%. In the same year MCB has the lowest Beta among the five securities. Its Beta is 0.006. Therefore, its expected return is Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

55

also lowest among theses five securities as 15.15% and the expected return on the market is 24.10%.it must be called as very defensive investment. As the Beta decreases, expected return on the security also decreases and as the Beta increases, expected return on the security increases. Therefore, it should be said that, there is direct relation between expected return on security and the systematic risk. It shows if the investor wants extra return than he will has to take extra risk.

In a year 1999, Fauji fertilizer has the highest Beta among these five securities. Its Beta is 1.88; therefore its expected return is also highest among these five securities. Its expected return is 29.42% and the expected return on the market is 21.50%. This investment is 1.88 times more volatile than the market. It is a very aggressive investment. It has the highest beta in this year as 1.88; therefore its expected return is also highest in this year among these securities.

In the same year, PSO has the beta of 1.46; its expected return is

25.46%, and the expected return on the market is 21.50%. It is also an aggressive investment, because its beta is higher than the market Beta. Therefore, it is 1.46 times more volatile than the market. So that it’s expected return is more than the expected return on the market. PSO expected return is less than the expected return of Fauji fertilizer, because PSO systematic risk is less than the systematic risk of Fauji fertilizer. In a same year PTCL has the Beta of 0.27; which is less then the market Beta 1.0. Therefore, its expected return is less than the expected return on the market. Its expected return is 14.93% and the expected return on the market is 21.50%. It is a defensive Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

56

investment. So that its systematic risk is less, in order to that its expected return is also low. PTCL expected return is less than the expected return of Fauji fertilizer and PSO, due to lesser Beta. In a year 1999, an Engro chemical has the Beta of 0.075. It is very defensive investment, because its Beta is lesser than the market Beta. Therefore, its expected return is also less than the market return. Its expected return is 13.17% while the expected return on the market is 21.50%. Its Beta is lesser therefore expected return is also lesser. Low Beta reveals low return and vise versa. In a year 1999, MCB has the lowest Beta among these securities; therefore its expected return is also lowest among these securities. Its Beta is 0.012 and the expected return is 12.61%. It is very defensive investment, because its systematic risk is very low, that’s why its expected return is also very low. It indicates that the MCB excess return is less than the excess return of the market portfolio.

This investment is 0.012 times less volatile than the

market. Its Beta is less than the market Beta therefore it is less volatile or riskier.

In a year 2000, Fauji fertilizer has the highest Beta among these securities. Its Beta is 1.93 and expected return is 26.17%. The expected return on the market is 17.80%. Its Beta is higher than the market Beta therefore; its expected return is also higher than the market return. It is very aggressive investment, because its Beta is more than the market Beta. In a same year Engro chemical has the Beta of 1.05 and the expected return is 18.25%. Its Beta is more than the market Beta therefore its expected return is also more than the expected return on the market. This investment is 1.05 times more volatile than Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

57

the market. This investment has high systematic risk therefore, it leads high expected return. Engro chemical Beta is less than the Beta of Fauji fertilizer, so that its systematic risk is less than the systematic risk of Fauji fertilizer. Therefore, expected return of Engro chemical is less than the expected return of Fauji fertilizers. In a year 2000, MCB Beta is 0.18 which is less than the market Beta. Its expected return is 10.42% and it is less than the expected return on the market as 17.80%. It is a very defensive investment. MCB has lower Beta, so that it also has lower expected return. In a same year PSO has a beta of 0.11 and the expected return is 9.79%. Its Beta is less than the market Beta, so that its expected return is also less than the expected return on the market. It is a very defensive investment. This investment is 0.11 times less volatile than the market, because it has lower systematic risk. Low systematic risk reveals low returns and vise versa. In a same year PTCL has the lowest Beta among these securities. Its Beta is 0.07; therefore its expected return is also lowest among these securities as 9.43%. PTCL expected return is less than the expected return on the market as 17.80%, because it has lowest systematic risk therefore it leads lowest expected return. It is a very defensive investment.

In a year 2001, Muslim commercial bank has the highest Beta among these five securities. Its Beta is 2.00; therefore its expected return is also highest among these five securities. Its expected return is 24.60% and the expected return on the market is 15.60%. This investment is 2.00 times more volatile than the market. It is a very aggressive investment. It has the highest beta in this year as 2.00; therefore its expected return is also highest in this year among these Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

58

securities. In the same year, Fauji fertilizer has the beta of 1.80; its expected return is 22.80%, and the expected return on the market is 15.60%. It is also an aggressive investment, because its beta is higher than the market Beta. Therefore, it is 1.80 times more volatile than the market. So that it’s expected return is more than the expected return on the market. Fauji fertilizer expected return is less than the expected return of MCB, because Fauji fertilizer’s systematic risk is less than the systematic risk of MCB. In a same year PTCL has the Beta of 1.55; which is more then the market Beta 1.0. Therefore, its expected return is more than the expected return on the market. Its expected return is 20.55% and the expected return on the market is 15.60%. It is a very aggressive investment. So that its systematic risk is high, in order to that its expected return is also high. PTCL expected return is less than the expected return of MCB and Fauji fertilizer, due to lesser Beta or lower systematic risk. In a year 2001, an Engro chemical has the Beta of 0.92. It is defensive investment, because its Beta is lesser than the market Beta as 1.0. Therefore, its expected return is also less than the market return. Its expected return is 14.88% while the expected return on the market is 15.60%. Its Beta is lesser therefore expected return is also lesser. Low Beta reveals low return and vise versa. In a same year, PSO has the lowest Beta among these securities; therefore its expected return is also lowest among these securities. Its Beta is 0.62 and the expected return is 12.18%. It is also defensive investment, because its systematic risk is very low, that’s why its expected return is also very low. It indicates that the PSO excess return is less than the excess return of the market portfolio. This investment is 0.62 times less volatile than the market. Its Beta is Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

59

less than the market Beta therefore it is less volatile or riskier. Therefore expected return of PSO is lowest among these securities.

In 2002, PTCL has the highest Beta among these securities. Its Beta is 1.74 and expected return is 23.66%. The expected return on the market is 17.00%. Its Beta is higher than the market Beta therefore; its expected return is also higher than the market return. It is very aggressive investment, because its Beta is more than the market Beta. PTCL is 1.74 times more volatile than the market, because its systematic risk is very high and it leads high return.

In a

same year Muslim commercial bank has the Beta of 1.28 and the expected return is 19.52%. Its Beta is more than the market Beta therefore its expected return is also more than the expected return on the market. This investment is 1.28 times more volatile than the market. This investment has high systematic risk therefore, it leads high expected return. MCB Beta is less than the Beta of PTCL, so that its systematic risk is less than the systematic risk of Fauji fertilizer. Therefore, expected return of MCB is less than the expected return of PTCL. In a same year, Fauji fertilizer Beta is 0.99 which is less than the market Beta. But the difference between market Beta and Fauji fertilizer Beta is only 0.01. It is very minor difference. Therefore the difference between its expected return and the expected return on the market is also very low.

Its expected

return is 16.91% and the expected return on the market is 17.00, the difference is only of 0.90. It is also a defensive investment. It is 0.99 times less volatile than the market. In a same year PSO has a beta of 0.95 and the expected return is 16.55%. Its Beta is less than the market Beta, so that its expected return is Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

60

also less than the expected return on the market. It is a defensive investment. This investment is 0.95 times less volatile than the market, because it has lower systematic risk. Low systematic risk reveals low returns and vise versa. In a same year Engro chemical has the lowest Beta among these securities. Its Beta is 0.10; therefore its expected return is also lowest among these securities as 8.90%. Engro chemical expected return is less than the expected return on the market as 17.00%, therefore it has lowest systematic risk and it leads lowest expected return. It is a very defensive investment. This investment is 0.10 times less volatile than the market.

It is concluded that market beta is always equal to 1.0. If the stock’s beta is equal to the market beta than the expected return on stock must be equal to the expected return on the market portfolio. It means that the stock’s excess return is equal to the excess return of the market portfolio; therefore, this security provides same return as the market portfolio return. If the investment is aggressive, means the beta of sock is greater than 1.0. Therefore it would be more volatile and riskier; it shows that it has high systematic risk, so that the expected return on stock would be greater than the expected return on the market portfolio. It means high risk leads high return. If the investment is defensive, means, stock Beta is less than the market Beta. Therefore it has less systematic risk or less volatile, therefore, the securities expected return would be less than the expected return on the market portfolio. This type of stocks are less risky and less volatile, therefore, the expected return on stock would be the lesser. It shows that low risk leads low return. According to the above analysis risk and Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

61

return have the direct relation, therefore, if the investor wants high return than he has to bears the high risk, in other words investor has to choose aggressive investments, On the other hand if the investor is risk averse and doesn’t want to take high risk than investor has to go for defensive investment. Where the risk is lesser and it also leads low return.

CONCLUSION

The objective of this research report is to elaborate and explain the relationship between risk and return. The analysis has been conducted on the basis of monthly data of last five years. All the analyses are based on KSE.

In the light of analysis, it has been concluded that Risk can affect the stock prices in two ways, either it can be positive or negative. If there is positive affect than investor gets capital gain and, if there is negative affect than investor suffers capital loss. Risk can not be eliminated at all. It can be minimized but can’t be eliminate entirely. Risk is a chance. Therefore risk can

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

62

move both the sides either positive or negative. By examining these analyses it is concluded that high risk reveals high return and low risk leads low return. When investor takes high risk ultimately he gets high return. Beta is measure of volatility or systematic risk, it is concluded by using CAMP approach that high beta leads high return while the low beta reveals low return. It means high risk leads high return and low risk leads low return. If the investment is volatile, than the stock Beta would be more than the market Beta, and leads high expected return of stock than the expected return on the market portfolio, and the vise versa. According to the above analysis risk and return have the direct relation; therefore, if the investor wants high return than he has to bears the high risk, in other words, he has to choose aggressive investments. On the other hand if the investor is risk averse and he doesn’t want to take high risk than he has to go for defensive investment. Where the risk is lesser and it also leads low return.

REFERENCES

Fama and French, “The Cross-Section of Expected Stock Returns,” Journal of Finance (June 1992), 427-65.

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

63

Capital Asset Pricing Model (CAPM): Test on Weekly Data from the Helsinki Stock Exchange. Journal of Business Economics 1997, Vol 46, No 04.

The Finnish Equity Market: Recent Trends and Important Events.

Economic

Papers 1998, Vol 11, No 01.

Expected

Stock

Return

and

Volatility:

Journal

of

Financial

Economics

(September 1987), 3-29

The Economic Value of Volatility Timing: Jeff Fleming, Chris Kirby, and Barbara Ostdiek… The journal of finance, VOL LVI, NO. 1. February 2001.

Return, Risk and Correlation of Emerging Stock Markets: By Steven Le. California State University, Long Beach.

Animal Spitits, Margin Requirements, And Stock Prices Volatility:

Paul H Kupiec and Steven A. Sharpe… The journal of finance VOL XLVI. NO. 2 June 1991.

Multidimensional Risk And the Modigliani-Miller Hypothesis: Robert W. Resek.

Monetary Environments And International Stock Returns: C. Mitchell Conover, Gerald R. Jensen, Robert R. Johnson…”Department of Economics and Finance,

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

64

University of North Carolina at Wilmington, Wilmington, NC 28403, USA… Journal of banking and finance 23 (1999) 1357-1381.

Information Diversity And Market Behavior: Stephen Figlewski…The journal of finance VOL XXXVII. NO March 1982.

Do Markets Overreact: International Evidence: Ahmet Baytas, Nusret Caklol… Montclair State University, School of Business Administration, Department of Economics and Finance, Upper Montclair, NJ 07043, USA…Journal of banking and finance 23 (1999) 1121-1144.

New-Issue Stock Price Behavior: J. G. McDonald and A. K. Fisher.

Risk And Return In Global Equity Market: John F. O. Bilson…Stuart School of Business, Chicago. June (1998). Stock Market Volatility A Psychological Phanomenon: David Barrett~Senior Sophister… Shiller, R. J. (1990) Market Volatility - pages 1-4, 71-76, 197- 214, MIT Press, London. International Encyclopedia Of Stock Market: Reviewed in Library Journal, May 1999: Stock Market Volatility: G. William Schwert…Financial analyst journal, 46 (May-June 1990) 23-34 (Graham and Dodd Plaque).

Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

65

Hussain, F. and Uppal J. “The Distribution of stock Returns in an Emerging Market: The Pakistani Market.” Pakistan Economic and Social Review. XXXVI:I (Summer 1998) 47-72.

Hussain, F. “The Day of the Week Effect in the Pakistani Equjity Market: An Investigation.” Unpublished.

Hussain, F.” Stock Returns and Stock Market Volatility.” Unpublished.

Nishat, M and Saghir A. “The Stock Market and Pakistan Economy: 1964-87.” Savings and Development 2(15) (1991).

Khilji, N., M. “The Behavior of Stocks Returns in an Emerging Market: a case Study of Pakistan.” The Pakistan Development Review,32:4 Part II (Winter 1993).

Khilji, N., M. “Non Linear Dynamics and Chaos: Application to Financial Markets in Pakistan. “ The Pakistan Development Review. 33:4 Part II (Winter 1994).

Ahmad, and Rosser, J, Jr. “Non-Linear Bubbles in the Pakistani Stock Market.” The Pakistan Development Review.

Farid, A. and Ashraf, J. “Volatility at Karachi Stock Exchange.” The Pakistan Development Review. Javed Mehboob (MBA) Final Research Report

An Analysis of Stock Market Behavior: Risk, Return, and Stock Market Volatility In Pakistan (KSE).

66

Stock Market Return and Volatility. (Quaid-e-Azam University).

Javed Mehboob (MBA) Final Research Report