Fama and French (1995,) test whether variations on stock prices, in relation to size and BE/ME reflect the

variations on earnings. Fama and French (1995, p.131) show that consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. They test their model on NYSE, AMEX and NASDAQ stock markets. They find that market and size factor in earnings explain the factors in returns but they did not find any relation between BE/ME factors in earnings and returns.

Gaunt (2004) tests validity of both the Fama and French model and the CAPM in Australian Stock Exchange. He finds that Fama and French three-factor model provides a better explanation of Australian stock returns than the CAPM. Another test of the three factor model in Australian market belongs to Faff (2004). He uses the Generalized Method of Moments approach. Results of the study support the three factor model based on asset pricing tests but when the estimated risk premia is considered, evidence for validity of the Fama and French model is less powerful.

Doganay (2006) tests the Fama and French model on Istanbul Stock Exchange. Test period includes the months from July 1995 through June 2005. This study supportS that excess market portfolio return, size and market-to-book ratio are effective on the variations of excess portfolio returns. Gkgz (2008) uses the ISE sectors indexes to test the model during the years 2001-2006. In this study, validity of the Fama and French three-factor model is tested for each industry, services, real estate, financel and technology sector indexes. It is concluded that Fama and French model has a powerful support in the scope of this study. It is also emphasized that since the model is applicable on ISE, it can be used by investors.
Later on, Fama and French in (1998) examined the value and growth stocks for the period 1975 to 1990 in international market and concluded that value stocks have better returns as compared to growth stocks around the world. Global portfolios of high book-to-market value outperformed low book-to-market value portfolios. In twelve out of thirteen major markets value stocks provided better returns as compared to growth stocks. Bundoo (2006) applied Fama and French model (1993) on Stock Exchange of Mauritius. The empirical evidences confirmed that Fama and French model holds for Stock Exchange of Mauritius. This study also found that F and F three factor model is vigorous in consideration of timevarying betas. For the period of September 1992 to April 2006, Iqbal and Brooks (2007) tested CAPM on the Karachi Stock exchange using two step Fama-Macbeth procedure. They tested it with both with and without riskless assets. In this study beta explained the Cross sectional variation in expected returns. Uzair and Hanif (2010) applied

CAPM on Karachi Stock Exchange covering period of 6 years (2003 to 2008) selecting 60 companies from KSE100 Index. Results showed that CAPM does not provide accurate results. Homsud et al. (2009) replicated the F and F three factor model over the period July 2002 to May 2007 to Stock Exchange of Thailand. They found that Fama and French model is better model to describe Thailand Stock Exchange as compared to CAPM Bahtnagar and Ramlogan (2010) used multiple regression approach to compare CAPM, split CAPM and the three factor model to explain the Average return in the United Kingdom Market for period April 2000 to June 2007. Results indicated that three factor models provided better results as compared to CAPM and Split CAPM in explaining UK market returns.

The aforementioned review indicates that asset pricing mechanism in Pakistani equity markets has not been investigated in detail. Only few studies are available and these too are restricted to conditional and unconditional CAPM or and Fama and French three factor model. These studies are based on very limited sample so it is need of time to investigate this important market of south Asia with a large set of sample that captures the current dynamics of equity market. This study is an effort to fill that gap in empirical literature

It is a global phenomenon Higher the risk higher will be the return. If we take the same statement for financial markets then this can be restated as higher the risk of the financial assets higher the return demanded. But the problem is how to quantify the risk so as to measure the return demanded for it. If this can be solved it will be of great help in problems like capital budgeting, cost benefit analysis, portfolio selection and for other decision relating to the knowledge of risk and return..