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Abstract:
The aim of this paper is to find the impact of risk, return on investment, growth and size on stock returns. The data have been collected from financial statements of 46 companies listed on KSE, covering 18 different sectors, for a period of 5 years i.e. 2008-2012. To test the hypotheses empirically, descriptive statistics and multiple linear regression techniques are used. Results show 39.6% correlation between predictor and predicted variables whereas 15.7% variation in predicted variable is explained by four predictor variables namely risk, ROI, growth and size. Three of the predictor variables, namely risk, ROI and growth, are statistically significant while size has a statistically insignificant impact on stock returns. The findings of this study are consistent with previous studies on the same topic, conducted in other markets. This study will be helpful for individual as well as institutional investors to estimate the expected returns of stocks based on the above mentioned variables before investing, thus enabling them to make better investment decisions.
Keywords: Stock returns, risk, return on investment, growth, size.
Introduction
Returns have positive link with systematic market risk. A dilemma of how to prefer a company and devise a strategy to maximize the stock returns, it needs concentration and discussion among business financial literature. Categorization of factors that affect the return is key concern for academic research. This particular subject has been discussed by various studies in finance (Dimitrov & Jain 2008; Korteweg 2010).
Over the last decade CAPM model has lost ground since empirical evidences suggest that beta does not effectively clarify cross sectional differences in normal returns. As a substitute, average stock returns have been affected by several new variables. For example, variable firm's size introduced by Banz (1981), profitability by Haugen and Baker (1996), growth in assets by Cooper, Gulen, & Schill, (2008), and historic returns introduced by Bondt & Thaler (1985), and Jegadeesh & Titman (1993).
The ups and downs in prices of stocks are the significant sign for the investors to take a decision about investing or not, in a particular stocks. Theories developed by different researcher like Wilcox (1984), Rappaport (1986) and Downs (1991) recommend that changing in price of shares are linked with changes in essential factors which related with share valuation...