Estimating Expected Return based on Capital Asset Pricing Model compared with Stock Interest Rate at Tehran Stock Exchange

Author Name(s): Mohammad Nasiri*, Aiuob Yaghmaei Alishah, Shams-Al-Saadat Sayyahmelli, Arman Karimi
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The objective of this study was to estimate the expected return rate based on asset pricing model compared with stock interest rate at Tehran Stock Exchange. Data related to 104 firms as sample was analyzed during 2010-2015 (n= 624). Data was analyzed using Excell and Eviews 6 software which central indices including mean, median and standard deviation dispersion indices, Skewness and Kurtosis were used in descriptive statistic part. These indices were conducted separately. Then, the normality of dependent variable was tested. Results suggested that

–        P/E ratio significantly related to expected return rate of investors based on CAPM model

–        P/E ratio significantly related to expected return rate of investors based on CAPM model in vehicle industry.

–        P/E ratio significantly related to expected return rate of investors based on CAPM model in pharmaceutical, cement, lime, and Plaster.


Using asset pricing model is one of the methods helping to investors to explore risk and return of investment. This model was introduced by William Sharp in 1960. In the Sharp model which is called asset pricing standard model, the systematic effect of base portfolio is measured. This model was has been highly regarded by investors and financial analysts.

The main subject in financial areas is that why different assets has different returns. In this regard, pricing theories based on theoretical conceptions have tried to specify that why some assets has higher or lower return compared with others. Previously, the firms and financial institutions, investors and financial experts considered the higher return in compatible with higher risk. But, using only CAPM model, the economists could measure the risk rate and the reward which is obtained for its tolerance. In 1964, the economist named William Sharp succeed to propose the single-factor model of asset pricing. The model is very simple and comprehensible compared with normative and cancellation model of Markowitz.

Providing the methods and stock analysis tools is one of the most important subjects related to investment culture in the current status of the country economic and given to economic policies to change capital market through re-forming stock exchange market and attracting funds by directing private part saving and its active participation in economic activities. Investment can be defined as losing some funds now with the hoping of gaining expected interest in the future. But, there is no confidence to the future events always, and uncertainty to all events in future has no identical degree. The person who has a decision to invest in common stock need to determine its intrinsic value, and then compare it with the market price. Some methods such as cash flow of share, added value, discounted cash flow and price-income ratio etc. were applied to estimate the intrinsic value of share. Todays, many of financial analysts as the price-income ratio as value deterministic factor. In fact, they compare the stock price with price-income ratio of other firms in industry and overall changes of market using this method. Also, each of investors seek different expected return rate related to investment in common stock according to their risk taking and expectations. Using asset pricing model, we can measure shareholders’ expected return (IzadiNya 2008:76-77).

Securities assessment is central core of investment decision-makings. It has been of interest to economic and financial experts. The financial market’s analyzers use from two fundamental and technical analysis. Technical analysis was proposed by Charles Dow about 100 years ago. In technical analysis is assumed that every things were considered in price. The analyzer need to transactions volume and prices to technically analysis. In fundamental analysis, the whole economic is considered firstly and then the effective factors. Next, an industry is considered and in the next stage, a firm was selected among the firms of that industry, and then its stock value is determined based on financial instruments. If the obtained value for a firm is higher than market price, it will be considered valuable and is purchased. One of the assessment methods used by analyzers is price-to-income coefficient of each share. In fact, although the dividend discounted models used more by investors and investment publications, the securities analyzers use of this method more than dividend discounted model. Although, it seems that use of price-to-income coefficient of each share is simpler than others, its simplicity should not cause that the investors ignore uncertainty future. So, the main problem of this study is that what is the rate of expected return based on asset pricing model compared with stock interest rate in Tehran Stock Exchange?

It should be noted that this study was faced with some limitations:

  1. The study period is the prosperity period of the market, or in other words, it was the period of prices’ bubble in stock exchange, and the price-to-income ratio value has a considerable growth in this period than previous years and perhaps it influence on the results of this study.
  2. Appling asset pricing model is caused that only the systematic risk factors is considered and the unsystematic risk factors is ignored, therefore, if we consider the unsystematic risk factors, perhaps the results of this study will be different.


Asset pricing pattern is an adjusted pattern to indicate the relationship between risk and individual assets return. In other words, assets pricing shows that how the assets are priced given to their risk. The basic assumption of asset pricing is that investors are familiar with various methods to find the efficient portfolio, portfolio theory and systematic reduction of risk. They act accordingly and they select one of the efficient portfolios based on their risk aversion degree. Introducing the methods and analysis instruments is one of the most important subjects related to investment culture in current economic conditions of Iran and according to economic policies to change the capital market through reformation of exchange market and fund attraction by directing private sector savings and active participation of it in economic activities. Each of investors seek a different expected return rate from investment in common stock according to their expectations and risk taking level. Using asset pricing model, we can measure the expected return rate of shareholders.

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