categories provided by DFM: (1) Shares: The DFM market lists various share
types, such as ordinary shares that provide investors with a stake of the
company, preferred shares that are virtual and issued by the companies and
traded in the market, and rights shares. Ownership in companies has limits in
order to avoid any obstacles for companies. (2) Dual listed shares: This type
of share is when companies list and trade their shares in more than one stock
exchange. An example of that could be RAK Ceramics, which is traded on the Abu
Dhabi Securities Exchange (ADX) and the Dhaka Stock Exchange in Bangladesh. (3)
Other financial instruments: DFM is working closely with the SCA to introduce
more financial instruments to benefit investors, and these include Short
Selling (not included currently), Market Makers, ETFs, Mutual Funds, and many

DFM was the
first market to consolidate its operations with NASDAQ Dubai to facilitate
transactions for investors and provide them with more asset classes to choose
from, while each market is regulated separately. Dubai Financial Market
provides investors with a wide diversity of economic sectors, such as banking,
transportation, insurance, consumer staples sectors etc…

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UAE Securities
and Commodities Authority (SCA) regulates the DFM market and issues laws and
standards to ensure maximum protection and security for investors and
introduced an initiative (Margin Trading and Delivery v Payment mechanism).

Demand exceeded
expectations and reached AED 201 Billion. It became publicly listed on 7th
March 2007 and was the first regional exchange to become publicly listed.
Furthermore, DFM is Sharia compliant reflecting His Highness Sheikh Mohammad
Bin Rashid Al Maktoum’s vision for the Emirate.

The DFM was
first launched on 26 March 2000 by Government of Dubai with a Decree of
14/2000. It became a public shareholding company on 27th December 2005, with a
very high IPO and 20% capital issued on the stock exchange.

The DFM market
has strengthened the Dubai market and made it the most successful financial
centre hub in the region in a very short time period. It is a secondary market
for trading securities for publicly listed companies and institutions, bonds,
notes and T-bills issued by the federal government, in addition to mutual funds
and diverse financial instruments.

About DFM Equity Market



 is the beta of asset i at time t.




A simple regression allows to estimate the beta of an
asset starting from the time series of risk-free rate and market returns. The
regression takes the form



The graph of the beta against the volatility is called
Security 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.





It is possible to derive the CAPM from decomposing a
portfolio between an asset and the market. Consider forming a portfolio p by investing an amount

 in a risky asset I, and an

 in the market portfolio m.  The expected return of
the portfolio is then given by

Moreover, the risk associated to an asset is dependent
on its covariance with the market portfolio. The asset is affected by the
market causing undiversifiable systematic risk that should be compensated;
according to the relationship between excess return of the asset and excess
return of the market.

Recall that one of the main findings of CAPM is the
identification of the market portfolio as the tangent portfolio (Schneeweis, et
al, 2010).

The opposite works for low-beta stocks, which are less
sensitive to market changes and less risky, yielding lower discount rate and
higher present value for the stock.

It is known that beta measures the volatility, which
in fact is proportional to the riskiness of the asset. The higher the beta, the
higher the discount rate, and the lower the present value of the future cash
flows, with a resulting lower present value of the asset.


The CAPM model applied to an asset gives the right
discount rate for the future cash flows generated by it. Such a rate depends on
the riskiness of the asset compared to the market, as defined by the beta.




The factor

called the beta

 (beta) of the asset
shows 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 as

In case of a null covariance with the market, the
asset has no risk attached, and can only earn the risk-free rate, in normal
market conditions. On the other hand, for a value of the covariance equal to
one, 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 risk
multiplied by the relationship of the asset with the market, expressed in the
form of covariance.

The right compensation for each asset is calculated
according to the covariance between the asset and the market (Lintner, 1965).

As shown in the graph
above, a direct relation is drawn between the risk premium and the excess
return on the market. On the other side, there is an inverse relation with the
market 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 asset
behaves compared to the market; as CAPM states (Sharpe,1964)

The market
is characterized by homogeneous information for all investors

Funds are
lent and borrowed at the same risk-free rate

optimize the investment in the risk-return space, as by MPT

The holding
period of the assets is the same for all investors

Markets are
frictionless, and transactions are free of costs

Markets are
complete with price taking investors

The main assumptions underlying the derivation of CAPM

Moving on, investors invest their money between
risk-free and tangency portfolio held in same proportions by all of them,
however, this is based on assumptions.

The CAPM model mentioned above, identifies the
tangency portfolio that lies on both the efficient frontier and CML, as the
market portfolio, and relating the price of any asset on the market to the
market itself.


 is the dependence
factor between market and asset.


 is the return of the



Recalling, the (Capital
Market Line) CML illustrates the relationship between the excess return of an
asset and the excess return of the market; as a line in the risk-return

Moreover, investors tend to hold combinations of the risk-free rate and
tangency portfolio. At last, the systematic risk of the asset is a proportion of the market risk and the risk
premium of an asset is proportional to its systematic risk.

On the other side, Modern portfolio theory determines the right expected
return on a portfolio of assets. The main point of this method is
diversification towards elimination of all non-systematic risk.

However, after the premium is calculated it is multiplied by a
coefficient called “Beta”. Beta measures how risky an asset is in proportion to
the market risk. This links between the expected return on the asset and the
risk premium in the market.

This model’s beginning point is the risk-free rate as
a benchmark for measuring a risk premium controlling the expected return on
some specific asset. The premium is demanded by the investors as compensation
for the risk.

The Capital Asset Pricing Model (CAPM) describes and
comprehends issues through mathematical demonstration of systematic risk;
proven to be a solution for the issue of risk measurement and remuneration as
depicted by Corelli (2016).

CAPM Model and Efficiency


3.      In addition, possible impact of the introduction of
short selling to the model is analyzed

2.      The task is solved by drawing the efficient
frontier, CML and SML of the market.

1.      The purpose of the research is to analyze the DFM
equity market in Dubai

Outline points