A COMPARATIVE STUDY ON APPLICATION AND

EFFECTIVENSS OF CAPM MODEL AND FAMA-FRENCH

THREE-FACTOR MODEL IN THE CAPITAL MARKET OF DHAKA
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Prepared for

Ms. Homayara Latifa Ahmed

Assistant Professor
Chairperson
IBA Career Centre
Supervised by

Prepared by

Ms. Rafia Afrin

Ayaz Mahmud

Lecturer

Roll-39
MBA 48D
MBA Internship Program

Institute of Business Administration

University of Dhaka
February 07, 2015

Objectives
Broad Objective:
To analyze the effectiveness of CAPM and Fama-French model
in the stock market of Dhaka.

Specific Objective:
To have an understanding of CAPM and Fama-French three
factor model for calculating required rate of return
To study the impact of CAPM and Fama-French three factor
model on the return of the textile industry
To identify the model better suited for calculating the future
required rate of return for the listed companies under the target
sector.

Methodology
Approach: Quantitative
Data Source: Dhaka Stock Exchange
Analysis Tool: Ms Excel
Both models were applied via regression to find out their
effectiveness.

Criteria Used: R2 and Adjusted R2 from ANOVA table

Scope and Limitations

Scope:
Only the Textiles Industry of Bangladesh

Time period: 5 years (2009 to 2013)

20 out of 38 listed companies were analyzed which were listed in or
before 2002

Limitations:
Only capital gain was considered as relevant proxy of return

2010-11 stock market crash may affect finding of the study

Organization Profile
IDLC Finance Limited
Largest NBFI in Bangladesh
Market cap Tk 1,500 cr vs Tk 870 cr of Lankabangla

1200 stuffs and 30 branches

Has two subsidiaries: Investments and Securities

3 main line of business (with asset composition):
Corporate (21.3%)
SME (39.8%)
Consumer (38.1%)

Introduction
After Modern Portfolio Theory by Markowitz (1952) different
models have been developed in order to relate excess portfolio
returns to excess market portfolio returns.
Capital Asset Pricing Model (CAPM) was developed by Sharpe (1964) and
Lintner (1965)
The Fama and French three-factor asset pricing model (1993) was
developed as a response to poor performance of the CAPM in explaining
realized returns

This report evaluated who have better explanatory power of

excess return over risk free return

Capital Asset Pricing Model - CAPM

CAPM describes relationship between risk and expected
return and that is used in the pricing of risky securities

FamaFrench Three-Factor Model

Uses three variables saying Small caps and high book to market
shares does better than large cap and low book to market shares

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Overview of Textile Industry

Exported $24.5b (2013-14)
81% of total export earnings
4.4 million workers (mostly woman)
4500 RMG factories
Vision to make it $50b industry in 2021
Tazreen fire and Rana plaza collapse tarnished brand

Accord and Alliance cleared 98% factories safe

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Assumptions of the Study

Prices were not adjusted for cash bonus or stock bonus.
Taken company data from 2009 to 2013 and compared them to
DGEN index returns.
2013 market capitalization and Book to Market value wise order of
the companies was constant throughout the observed period.
Considered 5 year T-bond, issued December 2014, with annualized
interest rate of 9.6% to be the relevant risk free rate (Rf).

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Price Data and Regression

Calculated
Daily price return of the companies
DGEN daily return

Ran regression with 1100 observations in spreadsheet software

ANOVA table with coefficient of determination, R square,
adjusted R square, p-value etc.

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Price Data and Regression

Company Trade Code and Name

Mkt cap
mn (size)

NAV/price
(value)

PRIMETEX( Prime Textile )

SONARGAON( Sonargaon Textiles )
DELTASPINN( Delta Spinners Ltd. )
METROSPIN( Metro Spinning )
TALLUSPIN( Tallu Spinning )
SAIHAMTEX( Saiham Textile )
CMCKAMAL( CMC Kamal )
APEXSPINN( Apex Spinning & Knitting Mills Limited )

714.34
291.14
1,953.76
725.86
1,137.00
2,055.00
1,841.57
639.24

3.12
3.09
1.90
1.53
1.31
1.10
0.95
0.68

SAFKOSPINN( Safko Spinnings )

ANLIMAYARN( Anlimayarn Deying Ltd. )
HRTEX( H.R.Textile )
SQUARETEXT( Square Textile )
STYLECRAFT( Stylecraft Limited )
MITHUNKNIT( Mithun Knitting )
ALLTEX( Alltex Industries Ltd. )
RAHIMTEXT( Rahim Textile )
AL-HAJTEX( Al-Haj Textile )
DSHGARME( Desh Garmants )
MODERNDYE( Modern Dyeing & Screen Printing Ltd. )

820.15
389.52
751.41
13,351.97
456.50
1,436.72
1,238.40
798.02
1,190.50
275.33
114.50

0.66
0.53
0.51
0.49
0.38
0.33
0.29
0.26
0.18
0.16
0.12

SMB

small
big

HML
high
high
high
high
high

big
big

small
big
small
big

small
small

low
low
low
low
low

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Comparative Analysis Of CAPM & Fama

French Model: Textile Industry
CAPM

Particular
R square
Industry
P-Value of
regression
coefficients

31.7%

Fama-French

Adjusted
Adjusted
Mkt Beta R square
R square
R square
31.6%

0.89

0.00%

39%

39%

Beta

SMB

HML

0.87

0.28

0.28

0.00%

0.00%

0.00%

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Conclusion
CAPM
Simplicity of use
Simplicity also limits capability to predict return

Fama French Model

Much more complex than CAPM
Better explains return using three factors

May not find it cost effective to collect the extra

information required by the three-factor model

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