Measurement of financial stability risk and its impact on return of assets – a case study of Pakistan stock exchange

A successful investment environment normally has positive earnings trend that ultimately beneficial for the stakeholders. In efficient market environment better earnings encourages healthy investment. However, in Pakistan enough attention has not yet been paid to this area which resulted in unsatisfactory growth of investment. Pakistan is now emerging as one of the efficient and potential market for investors; therefore, identification of investment sectors which generate healthy returns is inevitable. For the purpose it is essential to examine the relationship of risk and return in the financial market of Pakistan. The aim of research was to examine the relationship among these variables by using F- Score sorted portfolio method and to check its viability in the context of Pakistan Stock Exchange (PSX). The objective could be obtained by analyzing the relationship of risk and return by using Piotroski’s (2000) F-Score sorted portfolio method based on historical financial information. For this purpose, various Commonly Assets Pricing Models i.e CAPM, Fama French three factor model and Fama French five factor model were used to test collected data statistically for abnormal returns. The data was collected from various sources particularly from Thomson Reuters Data Stream for accounting data, Pakistan Stock Exchange and State bank of Pakistan website for daily share prices and Treasury bill rates. It was concluded that F-Score sorted portfolio of high ranked companies has high risky impact over returns whereas low F-Score companies return was less. The research study also revealed that the abnormal return could not be generated in PSX, based on financial statement information (F-Score).