Equitycategories provided by DFM: (1) Shares: The DFM market lists various sharetypes, such as ordinary shares that provide investors with a stake of thecompany, preferred shares that are virtual and issued by the companies andtraded in the market, and rights shares. Ownership in companies has limits inorder to avoid any obstacles for companies. (2) Dual listed shares: This typeof share is when companies list and trade their shares in more than one stockexchange. An example of that could be RAK Ceramics, which is traded on the AbuDhabi Securities Exchange (ADX) and the Dhaka Stock Exchange in Bangladesh. (3)Other financial instruments: DFM is working closely with the SCA to introducemore financial instruments to benefit investors, and these include ShortSelling (not included currently), Market Makers, ETFs, Mutual Funds, and manymore.
DFM was thefirst market to consolidate its operations with NASDAQ Dubai to facilitatetransactions for investors and provide them with more asset classes to choosefrom, while each market is regulated separately. Dubai Financial Marketprovides investors with a wide diversity of economic sectors, such as banking,transportation, insurance, consumer staples sectors etc… UAE Securitiesand Commodities Authority (SCA) regulates the DFM market and issues laws andstandards to ensure maximum protection and security for investors andintroduced an initiative (Margin Trading and Delivery v Payment mechanism). Demand exceededexpectations and reached AED 201 Billion. It became publicly listed on 7thMarch 2007 and was the first regional exchange to become publicly listed.
Furthermore, DFM is Sharia compliant reflecting His Highness Sheikh MohammadBin Rashid Al Maktoum’s vision for the Emirate. The DFM wasfirst launched on 26 March 2000 by Government of Dubai with a Decree of14/2000. It became a public shareholding company on 27th December 2005, with avery high IPO and 20% capital issued on the stock exchange.
The DFM markethas strengthened the Dubai market and made it the most successful financialcentre hub in the region in a very short time period. It is a secondary marketfor trading securities for publicly listed companies and institutions, bonds,notes and T-bills issued by the federal government, in addition to mutual fundsand diverse financial instruments. About DFM Equity Market is the beta of asset i at time t.where A simple regression allows to estimate the beta of anasset starting from the time series of risk-free rate and market returns. Theregression takes the form The graph of the beta against the volatility is calledSecurity Market Line (SML). It is the line where all efficient portfolios lie.
is the weight of the market in the portfolio. is the expected return of the market.where It is possible to derive the CAPM from decomposing aportfolio between an asset and the market. Consider forming a portfolio p by investing an amount in a risky asset I, and anamount in the market portfolio m.
The expected return ofthe portfolio is then given byMoreover, the risk associated to an asset is dependenton its covariance with the market portfolio. The asset is affected by themarket causing undiversifiable systematic risk that should be compensated;according to the relationship between excess return of the asset and excessreturn of the market.Recall that one of the main findings of CAPM is theidentification of the market portfolio as the tangent portfolio (Schneeweis, etal, 2010).The opposite works for low-beta stocks, which are lesssensitive to market changes and less risky, yielding lower discount rate andhigher present value for the stock.It is known that beta measures the volatility, whichin fact is proportional to the riskiness of the asset.
The higher the beta, thehigher the discount rate, and the lower the present value of the future cashflows, with a resulting lower present value of the asset. The CAPM model applied to an asset gives the rightdiscount rate for the future cash flows generated by it. Such a rate depends onthe riskiness of the asset compared to the market, as defined by the beta. The factor called the beta (beta) of the assetshows the proportionality of the asset risk premium to the market risk premium.The resulting model is the CAPM and is typically written as: The formula of the CAPM can be simplified asIn case of a null covariance with the market, theasset has no risk attached, and can only earn the risk-free rate, in normalmarket conditions. On the other hand, for a value of the covariance equal toone, the asset is perfectly related to the market, earning the market return. The expected premium on asset i should be equal to the risk premium per each unit of riskmultiplied by the relationship of the asset with the market, expressed in theform of covariance.The right compensation for each asset is calculatedaccording to the covariance between the asset and the market (Lintner, 1965).
As shown in the graphabove, a direct relation is drawn between the risk premium and the excessreturn on the market. On the other side, there is an inverse relation with themarket risk, known as variance. If an investor holds an amount of market portfolio,the single asset risk compensation should be an effect of how the single assetbehaves compared to the market; as CAPM states (Sharpe,1964)- The marketis characterized by homogeneous information for all investors- Funds arelent and borrowed at the same risk-free rate- Investorsoptimize the investment in the risk-return space, as by MPT- The holdingperiod of the assets is the same for all investors- Markets arefrictionless, and transactions are free of costs- Markets arecomplete with price taking investorsThe main assumptions underlying the derivation of CAPMareMoving on, investors invest their money betweenrisk-free and tangency portfolio held in same proportions by all of them,however, this is based on assumptions. The CAPM model mentioned above, identifies thetangency portfolio that lies on both the efficient frontier and CML, as themarket portfolio, and relating the price of any asset on the market to themarket itself. is the dependencefactor between market and asset. is the return of themarket.where Recalling, the (CapitalMarket Line) CML illustrates the relationship between the excess return of anasset and the excess return of the market; as a line in the risk-returnspace. Moreover, investors tend to hold combinations of the risk-free rate andtangency portfolio.
At last, the systematic risk of the asset is a proportion of the market risk and the riskpremium of an asset is proportional to its systematic risk. On the other side, Modern portfolio theory determines the right expectedreturn on a portfolio of assets. The main point of this method isdiversification towards elimination of all non-systematic risk. However, after the premium is calculated it is multiplied by acoefficient called “Beta”. Beta measures how risky an asset is in proportion tothe market risk. This links between the expected return on the asset and therisk premium in the market. This model’s beginning point is the risk-free rate asa benchmark for measuring a risk premium controlling the expected return onsome specific asset. The premium is demanded by the investors as compensationfor the risk.
The Capital Asset Pricing Model (CAPM) describes andcomprehends issues through mathematical demonstration of systematic risk;proven to be a solution for the issue of risk measurement and remuneration asdepicted by Corelli (2016). CAPM Model and Efficiency 3. In addition, possible impact of the introduction ofshort selling to the model is analyzed2.
The task is solved by drawing the efficientfrontier, CML and SML of the market.1. The purpose of the research is to analyze the DFMequity market in DubaiOutline points
