Probability of Return under CAMP: An Empirical Study of the Interest Margin

Abstract

Capital Asset Pricing Model (CAPM) holds predominant position in finance for the determination of expected rate of return from an investment. Probability of loss plays significant role for investment decision making but previous studies in Pakistan have not taken up this concept in the CAPM. Scope of the previous studies encompasses mere testing of the validity of CAPM in Pakistan using the time inconsistent methods of finding risk and returns. This study applies probability of getting the required rate of return calculated through CAPM at par with the some standard rate defined by the system in Pakistan. Evidence of market imperfection in the context of negative risk premium has also been discovered. Predictive aspect of the CAPM has been put to test in order to find gap between the monetary and the real sector with increasing rate of interest margin in the banking sector of Pakistan.