Abstract
This study examines the effect of asset growth premium on future stock returns using data of 285 firms listed on Karachi Stock Exchange using the Fama Macbeth methodology (1973) also known as two pass test. We applied both the one pass and two pass regression on single factor model and two factor model. The validity of CAPM is checked and is not considered as appropriate in Pakistani stock market. After the incompetence of CAPM, Asset Growth Premium is added to the single factor to check the predicting ability of the new two factor model i.e. market premium plus asset growth premium. Adding asset growth premium to the model enhances the ability of the model to predict future portfolio returns. Our results further suggest that, asset growth premium is a priced variable in determining the future returns and can be used by the investors for strategic decision making.