As our portfolio is based on a a couple of sectors, so I assume that following variables considered in this

regression can have an impact on the expected returns of our portfolio. Although the variables assumed
are common macroeconomic variables, but this regression proves the impacts oin our portfolio.

Multivariate Regression:
Source SS df MS Number of obs = 16
F( 5, 10) = 4.02
Model 1.56408178 5 .312816355 Prob > F = 0.0293
Residual .778941948 10 .077894195 R-squared = 0.6675
Adj R-squared = 0.5013
Total 2.34302372 15 .156201582 Root MSE = .2791

PortfolioRe~s Coef. Std. Err. t P>|t| [95% Conf. Interval]

KSE100 .0000401 .0000192 2.09 0.063 -2.68e-06 .0000829

FDI 1.21e-10 5.09e-11 2.37 0.039 7.24e-12 2.34e-10
Exchangerate -.0251045 .0108237 -2.32 0.043 -.0492211 -.0009879
OilPrices .0094041 .0035592 2.64 0.025 .0014737 .0173346
InflationRate -.0565418 .0280803 -2.01 0.072 -.1191087 .006025
_cons 1.682147 .5465204 3.08 0.012 .4644235 2.89987

The results of this multivariate regression is based on the regression of KSE100 index, foreign direct
investment, exchange rate, oil prices and inflation rate against the expected returns of the portfolio
based on nearly, 16 stocks, comprising the automobile sector, pharmaceutical sector , FMCG sector,
fertilizer sector, cement sector, steel sector and chemical sector.

Although it is believed that the domestic economics played an important role in the execution of stock
market. But the foreign investors have seen a tremendous trust in the Pakistani economy in the recent
years. The FDI is a long term commitment in the economic activities of the host country. There has been
a number of studies on the relationship of FDI and stock market. The stock market has a positive
influence on the growth of FDI (Olasukanmi, 2009). Even our results reflects the same side of the story.
The t-statistics of the FDI variable supports our results too. The share of the FDI is invested in the
Pakistan Stock, as it has been witnessed in a couple of years. So, overall this will increase the value of
the portfolio and the expected returns too. The effects of exchange rate can influence FDI and the
distribution of investments across the country. The depreciation of the exchange rate can have both the
positive and negative impacts. In the starting, the contraction of wages and production costs of the
country with the foreign counterparties. It also reduces the return of the foreign investors. The
coefficient and t-statistics of the exchange rate is negative as according to our expectations. The
depreciation of the currency like our case the Pakistan rupees against the US dollars will affect the
inflow of the FDI. As per the theory, the investors are mostly interested in the high returns oin the
investment. The negative sign of the coefficient exchange rate indicates that depreciation in the
Pakistan rupee negatively influences the inflow to the Pakistan. In a nutshell, there is a great role of the
monetary policy in the FDI inflows, so it’s preferable for the stable currency.

The role of oil prices have played a great in the expenses of the oil-importing countries especially
Pakistan. Our regression predicts there is a positive relationship between the oil prices and the expected
returns of the portfolio. Different studies have shown this result. Asghar and Ansar (2003) summarized
the effects of oil prices on the inflation (CPI) and stock exchange (KSE100). This study also revealed that
there is positive relationship between the oil prices and expected returns. This is the following equation
after regression.
 𝐸(𝑅) = 3.08 + 𝛽 𝐾𝑆𝐸100 (𝐾𝑆𝐸100) + 𝛽 𝐹𝐷𝐼 (𝐹𝐷𝐼) − 𝛽 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒𝑟𝑎𝑡𝑒 (𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑅𝑎𝑡𝑒)
− 𝛽 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛𝑟𝑎𝑡𝑒 (𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒) + 𝛽 𝑜𝑖𝑙𝑝𝑟𝑖𝑐𝑒 (𝑂𝑖𝑙 𝑃𝑟𝑖𝑐𝑒)
The increase in the oil prices results in the increase in the value of the oil exploration companies, but at
the same time, this increase will increase the input costs and other administrative costs of the portfolio
stocks. This increase in the prices results in the transfer of the increased prices to the consumers, which
will have the two effects. Although the revenues of the companies increases but in the long term, the
only inelastic goods somehow shows the positive trend, while the other stocks will show decrease in the
demand of the volume of goods. Overall, this inflation will decrease the portfolio of our returns, as our
stocks are not only oil exploration based.

Keeping all these factors in mind, the expected return of our portfolio is meant to be increased because
of the expected increased FDI, stable oil prices (predicted till 2020), within ranged inflation rate (6-7%).
The exchange rate devaluation is a two way sword, have positive and negative effects, but keeping the
proportion of our portfolio, we are less affected to be with the fluctuations of the rupee against the
dollar to a normalized level. In the last 1 ½, we have lost nearly 4% of our portfolio, till now, we have
nearly recovered almost all our portfolio, so overall, we are up to the market index.

The VIF below shows that our variables are not having multi-collinearity issues. In addition, the
heteroskedastcity supports our result.

Variable VIF 1/VIF

KSE100 13.91 0.071905

Exchangerate 10.03 0.099704
InflationR~e 2.53 0.394641
FDI 2.20 0.455120
OilPrices 2.01 0.497232

Mean VIF 6.14

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of PortfolioReturns

chi2(1) = 0.10
Prob > chi2 = 0.7467

Ramsey RESET test using powers of the fitted values of PortfolioReturns

Ho: model has no omitted variables
F(3, 7) = 1.17
Prob > F = 0.3874

Citations
Ansar, I. and Asghar, N. (2013). The Impact of Oil Prices on Stock Exchange and CPI in Pakistan. Journal of
Business and Management, 7(6), 32-36.