A Capital asset pricing model based system design for stock performance measurement in İstanbul stock exchange

Abstract

EXECUTIVE SUMMARY Basic philosophy behind writing this master thesis was to show that a combination of theoretical models and pragmatic approaches that aim to measure a stock's performance, would yield fairly satisfactory results while dealing with emerging stock markets with relatively lower market efficiencies, such as Istanbul Stock Exchange. A computer based integrated system that was based on Capital Asset Pricing Model has been established in order to assess the relative risk and return of stocks by various attributes such as: - alpha, - beta, - standard deviation, - moving average return on investment, - return on market, - volatility, - turnover ratio, - P/E ratio, - market to book value, - dividend yield etc. In order to ensure the integrity of the proposed model eight basic groups of files (LOTUS 1-2-3 Release 3 spreadsheets) which are: - ISE weekly data entry file, - Market portfolio file, - Individual company files, - Index preparation files, - Sectoral index preparation files, - Price adjustment files, - Monthly stock evaluation reports and - Yearly stock evaluation reportshave been generated and linked to each other, thanks to the relative reference ability of the software that has been used throughout this study. The adopted methodology enables the user to draw the security market line and to define the overpriced and underpriced securities at any time, based on the performance of those stocks that are traded in ISE. Furthermore, in order to better measure the market return, a new index has been developed and separate sectoral indices have been designed. In the same manner, to ensure the statistical stability on past stock price data, necessary adjustments have been carried on to smooth the past price trend after stock splits. Finally at the last stage of the study, a possible extension of the model that would basically cover the major stock exchange indicators such as : - Price earnings ratio, - Market to book value and - Dividend yield has been proposed, in order to show how flexible the system is, to further enlargement and refinement by taking into account some financial statement characteristics of those companies whose stocks are traded in ISE. Obviously one could append another module that would basically assess the risk-free rate of return, by concentrating on previous auction rates for T-bills and Government bonds. In its current format, the proposed system is open to further refinement and enlargement. Though the adoption of a high-level structured programming language such as Pascal, Cobol or C, rather than Lotus 1-2-3 Release 3, would considerably reduce the memory requirement of the system, the evaluation philosophy and methodology would remain the same.