Thesis Defense.pptx

This is my seminar presentation of research work as a partial fulfillment of the On-Campus Advanced Master of Business Administration Degree.

1. Paradox of Capital Asset Pricing Model and Stock Price Valuation in The Context of Bangladesh Emran Hossen Advanced MBA Program Reg No:21824200017,Season:2021-22 Supervisor Md. Saiful Islam Assistant Professor of Finance & Banking Department of Finance & Banking National University, Bangladesh

2. What How Outcomes Introduction Motives of the Study Problem Statement Objective of the Study Research Questions Literature Review Conceptual Framework Research Methodology Major Findings Addressing the Research Objectives Recommendations Conclusion Conference and publication References 2 Presentation Outline

3. Capital Asset Pricing Model (CAPM) and stock prices have gotten much consideration from academics and industry due to their applicability in emerging economics. Leal, D., Jiménez, R., Riquelme, M., & Leiva, V. (2023) CAPM test will be conducted to determine the appropriate model to measure the trade-off between risk and return. This model takes into account the sensitivity of the asset to and the systematic risk represented by beta, as well as the expected return of the market and the return of the risk-free security . Elshqirat , D., & Sharifzadeh , M. M. (2018) Accurate stock prices are very important for investors, managers, analysts, and researchers, among. The Financial theory looks at the capital asset pricing model (CAPM) as the most popular and widely used concept for defining the discount rate and calculating the discount rate to establish the value of the investment. Pramono, Siboro, F., Baqi, M. P. A., & Julianingsih, D. (2022) Introduction 3

4. The growing use and acceptance of the model has made it such an important model that, even in emerging markets like Bangladesh, CAPM has received a lot of attention. The Dhaka Stock Exchange, despite being established many years ago, is still going strong . Polk, Vayanos , D., & Woolley , P. Sembiring , F. M. (2022) Despite many criticisms, the CAPM is still considered one of the most important pricing models in modern finance. CAPM focuses on calculating the expected return of security. It helps investors to identify suitable stocks from DSE to accurately predict the value of stocks using CAPM . (Basu, 1977; Fama & French, 1992 4 Many scholars agree that the use of CAPM is an important aspect of investment for investment decisions and stock prices. they analyzed the Fama -French (1992) methodology to test whether the CAPM is a good indicator of asset prices in Bangladesh . Chowdhury, A. R. (2021). Lin, Q. (2022) Introduction (Continued)

5. To provide sustainable investment decision making process. To Improve the existing CAPM model on emerging economics. To provide insights information for Individuals investors & Academicians 5 Motivation of the Study

6. The main problem of this research is that investors frequently faced challenges regarding on Investment decision making on stock price and CAPM model. Therefore, t his study aims to contribute to the existing model by introducing a new paradox considering stock prices and CAPM. 6 Problem Statement

7. The Following are the specific objectives: To explore the Dhaka Stock Exchange (DSE) market Efficiency. To Investigate the relationship between Beta and Expected Return. To examine significant difference between the mean of Capital Asset Pricing Model (CAPM) and Holding Period Return (HPR). 7 Objectives of the Study

8. Is Dhaka Stock Exchange (DSE) Efficient? Is there any relationship between Beta & Expected Return? Is there significant difference between the mean of CAPM & HPR? 8 Research Questions

9. Name of papers Authors Study descriptions Conventional and downside CAPM: The case of London stock exchange Rutkowska-Ziarko et al. (2022) found the price of stock price is a major point of contention. Since different investors assign a lower weight to positive deviations from the mean than to negative ones. Another formula for beta that is used is the LPM-based beta coefficient, also called the "Downside beta coefficient" Testing Capital Asset Pricing Model (CAPM) on Dhaka Stock Exchange. Chowdhury, A. R.(2021) focused on determining the validity of the Capital Asset Pricing Model (CAPM) in the Dhaka Stock Exchange (DSE) both at the individual security level and at the portfolio level. Accounting beta in the extended version of CAPM. Elshqirat and Sharifzadeh (2018) The study found that only operational leverage affects the expected exchange rate. 9 Literature Review

10. Name of papers Authors Study descriptions CAPM: Empirical evidence from India. International Journal of Core Engineering & Management. Shrivastav , S. M. (2017) The study utilized cross-section and portfolio analysis. However, the results did not support the basic CAPM hypothesis that higher risk (beta) is associated with higher returns. The study concluded that CAPM is not suitable in the Indian capital market. The downside risk approach to cost of equity determination for Slovenian, Croatian and Serbian capital markets. Momcilovic et al.(2014) Extensive research on other emerging markets such as the Slovenian, Croatian and Serbian markets has shown that the relative risk factors determine the average return. A validity test of capital asset pricing model for Dhaka stock exchange Hasan et al. (2011) They provide evidence against the CAPM although they find a correlation between beta and security performance. 10 Literature Review (Continued)

11. Name of papers Authors Study descriptions Validity of capital asset pricing model in Pakistan: Evidence from Karachi Stock Exchange. Syed et al. (2011) The study showed that the Capital Asset Pricing Model (CAPM) effectively predicted the return of short-term investments compared to long-term investments. Test of CAPM in emerging stock markets: A study on Dhaka stock exchange. Symposium of USM Fellowship Holders. Ali, M. H., & Ali, R. (2009) They found a relationship between risk (beta) and return but concluded that this relationship is not linear. The study suggests that CAPM has a weak contribution to emerging capital markets. Application of EMH on stock exchange indexes. Dima, and Laburnet (2007) They found the EMH cannot be sustained in any of its forms based on their analysis of stock exchange indexes. 11 Literature Review (Continued)

12. Holding Period Return: The total return received from holding an asset or portfolio of assets over a period of time, known as the holding period. Expected Return: The expected return is the amount of profit or loss an investor can anticipate receiving on an investment. Efficient Market : Is a hypothesis that states that share prices reflect all available information and consistent alpha generation is impossible. Inefficient Market : A n inefficient market is one in which an asset's prices do not accurately reflect its true value, which may occur for several reasons. Notes for Conceptual Framework 12

13. Monthly Closing Price Dividend of the Year Risk Free Rate Capital Yield Dividend Yield Holding Period Return Step 1 Market Return Beta Expected Return (CAPM) Step 2 Compare Step 3 Efficient Market (Correctly Price) Inefficient Market (Misprice) Step 4 Overvalued Undervalued Conceptual Framework 13 Source: Developed by authors on basis of Gunawan, B., Dionysis , G., Kurnianto , Y. I. B., & Utami, S. R. (2017), Efficient Market Theory.

14. Research Methods Population 18 industrial sectors from Dhaka Stock Exchange Sampling Techniques Simple random sampling Sample Size 277 Companies who have been actively traded at least over the past five years. Data Collection Secondary Source- the monthly closing prices of shares and closing index value of the benchmark market index.(DSE Website, Investing.com, Amarstock.com,lankabd.com ). Measurements Instruments Capital Asset Pricing Model Holding Period Return , Beta, Z-test Software Microsoft Excel and SPSS 14

15. Sectors Total Number of the Companies No. of sample companies Data Coverage (%)   Bank 35 28 80.00% Cement 08 08 100.00% Ceramics 05 04 80.00% Engineering 42 27 64.29% Financial Institutions 23 22 95.65% Food & Allied 21 18 85.71% Fuel & Power 23 17 73.91% Insurance 57 45 78.95% IT-Sector 11 06 54.55% Jute 03 03 100.00% Miscellaneous 14 12 85.71% Paper & Printing 06 03 50.00% Pharmaceuticals & Chemicals 34 26 76.47% Services & Real Estate 04 04 100.00% Tannery Industries 06 06 100.00% Telecommunication 03 02 66.67% Textile 58 44 75.86% Travel & Leisure 04 02 50.00% Total 357 277 77.59% Source: Authors calculation Sector-wise Percentage of Data Coverage 15

16. The Expected Rate of Return & Holding Period Return 16

17. Individual Security’s Beta & Expected Return 17

18. Scenario of Pharmaceuticals & Chemicals Sector 18

19. Sector-wise Performance Source: Authors calculation 19

20. Particulars  Required Rate of Return (CAPM) Estimated Return (HPR) Mean 0.136408441 0.065815626 Known Variance 0.0006 0.0133 Observations 277 277 Hypothesized Mean Difference z 9.96535981 P(Z<=z) one-tail z Critical one-tail 1.644853627 P(Z<=z) two-tail z Critical two-tail 1.959963985   Hypothesis Test Z-test Source: Authors calculation 20

21. Findings and Discussion

22. The analysis reveals that out of the 277 companies representing various sectors, a substantial majority, specifically 223 companies, are deemed to be overvalued. In contrast, 54 companies are classified as undervalued. Remarkably, none of the companies fall within the bracket of being fairly priced. This assessment is consistent across all 18 sectors, highlighting that, on average, companies within these sectors are presently in an overvalued position. In this study, it was identified that out of the 277 companies analyzed, 223 of them were classified as overvalued. Consequently, it is recommended that investors consider selling these stocks, as there is a possibility that their prices could experience a decline in the future. Findings and Discussion (Continued) 22

23. Addressing the Research Objectives 23

24.   When the market behavior is abnormal, investors may consider investing in low-risk and moderately risky shares.   An investor can invest on highly risky shares when the market behavior is normal.   Investors can invest undervalued shares for getting positive returns, therefore stock prices are expected to increase in the near future. or can sell overvalued stocks to avoid loss. Therefore, stock prices may fall in future. Recommendations SELL BUY 24

25. T he capital market in Bangladesh is primarily dominated by a few institutional investors, with the majority of investors being retail investors. Institutional investors have the capacity to conduct extensive research on the capital market, but when the capital market behaves abnormally, retail investors often suffer losses. While the calculation of CAPM is a meticulous process, it serves to identify safer investment opportunities. This study has tested and recommended the use of the Capital Asset Pricing Model for valuing the DSE stock market for investment purposes. Conclusion 25

26. Conference and publication 26

27. Chowdhury, A. R. (2021). Testing Capital Asset Pricing Model (CAPM) on Dhaka Stock Exchange. Elshqirat , D., & Sharifzadeh , M. M. (2018). Testing a multi-factor capital asset pricing model in the Jordanian stock market. Hasan, M., Kamil, A. A., Mustafa, A., & Baten , M. A. (2011). A validity test of capital asset pricing model for Dhaka stock exchange. Journal of Applied Sciences , 11 (20), 3490-3496. Rutkowska-Ziarko , A., Markowski , L., Pyke, C., & Amin, S. (2022). Conventional and downside CAPM: The case of London stock exchange. Global Finance Journal , 54 , 100759. Momcilovic , M., Zivkov , D., & Begovic, S. V. (2017). The downside risk approach to cost of equity determination for Slovenian, Croatian and Serbian capital markets. Syed, A. R. S. T. J., Imtiaz, A., & Fahim, Q. (2011). Validity of capital asset pricing model in Pakistan: Evidence from Karachi Stock Exchange. African Journal of Business Management , 5 (32), 12598-12605 Hoque, M. E., & Low, S.-W. (2020). Industry risk factors and stock returns of malaysian oil and gas industry: A new look with mean semi-variance asset pricing framework. Mathematics , 8 (10), 1732. 27 References

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