Founding of Finance - Essay Example

Comments (0) Cite this document
Foundation of Finance Based on your own research discuss whether Capital Asset Pricing Model should be used to estimate the Net Present Value of a project? Introduction In finance, Capital Asset Pricing Models (CAPM) is used to describe the relationship between risk and expected rate of return while dealing with pricing of risky securities…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER92.9% of users find it useful
Founding of Finance Essay
Read TextPreview

Extract of sample
"Founding of Finance"

Download file to see previous pages Time value of money represents the period of time an investor placed his money in any investment. At the same time, the risk factor offers price to investors for investing their money in risky securities. The sum total of both these factors gives a clear view regarding the expected rate of return on a particular asset. It is generally calculated by using a risk measure called beta. This paper will discuss whether the capital asset pricing model should be used to estimate the Net Present Value of a project. Capital Asset Pricing Model The CAPM was originally developed by Harry Markowitz in 1952 and it was fine-tuned by others including William Sharpe. As stated above, CAPM calculates rate of return of an asset by adding the value of risk taken with duration of investment. The formula used to describe the CAPM relationship is illustrated below. Required (or expected) Return = RF Rate + (Market Return – RF Rate)*Beta. In order to clearly determine the applicability of CAPM, it is necessary to discuss the working method of the model. Assume that risk-free rate is 5%, the beta measure of the stock is 3, and the expected rate of market return for this period is 12%; then the expected rate of stock becomes; 5%+3(12% - 5%) = 26% In the opinion of Roll and Ross (1980, pp.1073-1103.), this theory had considerable significance in empirical work during 1960’s and 1970’s. However further researches on this concept have questioned its reliability and authenticity of the computation of empirical constellation of asset returns; and, many related theories have detected ranges of disenchantment with the CAPM. As a result, the most widespread CAPM underwent harsh criticisms not only by the academicians but also by financial experts. In addition, empirical researchers have gathered a range of evidences against this model during the last few decades. Those evidences questioned the model’s assumptions and argued the dead of the beta. Roll and Ross (1980, pp.1073-1103.) say that this situation led to the demand for a more potential theory and it caused the formulation of Arbitrage Pricing Theory (APT). Although, APT was developed recently, CAPM is considered as the basis of modern portfolio theory. According to Shanken (1982, pp.1129-1140), the ATP is not more susceptible to empirical verification than the CAPM. The author also challenges the testability of arbitrage pricing theory as he finds that the basic elements of testability strategy would not properly work in the case of this model. He also points out that the theory precludes the differentials of expected return that form the basic structure of the concept. Huberman and Wang (2005, pp. 1-18) claim that both the CAPM and APT show relation between expected returns of assets and their co-variance with other random variables; and an investor cannot avoid some types of risks by diversification and the concept of covariance is interpreted as a measure of such risks. There is only a single non-company factor and a single beta for CAMP and this formula only uses market’s expected return. Under CAPM, it imposes certain strict restrictions regarding individual portfolios and hence the requirements of this model also are much restrictive.However, the level of applicability of this theory is still a debatable topic in international economic conferences. In order to reacha conclusion regarding the efficacy of ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“Founding of Finance Essay Example | Topics and Well Written Essays - 2000 words”, n.d.)
Retrieved from
(Founding of Finance Essay Example | Topics and Well Written Essays - 2000 Words)
“Founding of Finance Essay Example | Topics and Well Written Essays - 2000 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document
Politics (the founding fathers)
...the concept of elitism and worked hard to bring equality in the nation. America through the enlightenment achieved great homogeneity and unity. They committed the entire nation to a single language unlike the Europeans. This homogeneity that was generated out of the enlightenment became the greatest strength of America and founded the base for what it is now. The powerful dreams of the American Enlightenment paved the way for America's independence. This alone created the basic principles of the American Government. The enlightenment concepts made people understand that a ruler or a government needs to strictly adhere to the higher laws of the republic. Political geniuses like Thomas Jefferson, Thomas Paine, Alexander...
6 Pages(1500 words)Essay
The Founding Fathers Suspicion
...?The United s has a government for the people and by the people. Our founding fathers saw the government as a representative type of government rather than a government ruled by the people through a direct democracy. James Madison wrote in the Federalist No. 63 that democracy’s defining principle “lies in the total exclusion of the people in their collective capacity.” (as cited from Ferrand, 1911, p. 422 ). Democracy to a representative type of government lies with rules and limitations provided in a written constitution and not based on a “mob” rule or the rule of the majority by themselves. During the 1700’s and 1800’s, people’s revolution was inherent and countries like the United States and France achieved their...
3 Pages(750 words)Essay
Religion and Americas Founding
...Religion and Americas Founding It is very true that the present-day notion of the separation of the church and is at odds with the Founding fathers’ vision of religion’s role in our democratic republic. The Founding Fathers would be seriously shocked if they woke up from the dead and find what is currently going on in America. Things have greatly metamorphosed from how they were in the past. It is true that the Founding fathers were truthfully religious Christians. They did not only read the Bible, but also lived by it. Their children were also given Biblical names, and most of their communities were given names after the cities in the Holy land. The Christian Americans...
4 Pages(1000 words)Essay
Founding Fathers
...? FOUNDING FATHERS Introduction America has a proud, democratic history. The country was born due to the visionary leadership of its founding fathers, who ensured that the country was built based on citizen liberties and respect of the constitution. These visionaries drafted a document that served as an inspiration for democracies worldwide. The founders were keen in ensuring that the government that would take over would be defined by liberties of individuals and the quest of happiness for its citizens who will be accommodated by the government and its systems (Mason and Rauchut, 2008). This is to say that the founders intended to form a government, whose sole purpose was to ensure freedom and prosperity...
2 Pages(500 words)Essay
The Founding of the Caliphate
...? The founding of the Caliphate (your HsTl0l meeting time The Founding of the Caliphate Introduction The Term caliphateis derived from the word ‘caliph’, meaning ‘successor’ in Arabic. It refers to the system that was established and represented by Islam referring to the political and economical unity of all the Muslims. In this system, Caliph is the head of the state and official representative of Islam. The Caliphate system follows the constitution given by the Islamic laws. Initially, it was established by Muhammad who fought many wars and established an Islamic state with political, economical and social stability. People’s right like social security, family structure, rights of women and children...
5 Pages(1250 words)Essay
Wilhelm Wundt the founding father of psychology
...? WILHELM WUNDT THE FOUNDING FATHER OF PSYCHOLOGY Wilhelm Maximilian Wundt was born in 1832 in the small village of Neckerau in Germany (Bre?hier, 1969).  At the age of 19, he proceeded to the university where he took up Medicine as a field of study. However, his interest was more aligned to a scientific paradigm. Wilhelm would later be appointed as a instructor in 1857 and began lecturing on physiology (Bre?hier, 1969). Wilhelm later became an assistant professor at Heidelburg and formulated a course known as physiological psychology. The course focused on the relation between psychology and physiology. This referred to the relation between a person’s reactions and the senses. Evidently, his course laid the foundation of...
3 Pages(750 words)Essay
Founding a new nation
...? Founding a New Nation The island is newly found and the count of people is very less to inherit a constitution from a huge country. Sincethe government will be democratic, so it will be made in the favor of the nation according to their consensus. Since the island is very small, it will need to have a very strong foreign policy defined to ensure the future prosperity of the nation. The government system will be federal and the rights of the federal government will be passed down to a combination of mayors and judiciary of each town. The constitution will have a few sections divided on the base of power and responsibility and will then be further divided into laws. It will protect the rights of the...
5 Pages(1250 words)Essay
American Ideals by a Founding Father
...INDIVIDUAL CONTRIBUTIONS TO AMERICAN IDEALS BY A FOUNDING FATHER and Section# of INDIVIDUAL CONTRIBUTIONS TO AMERICAN IDEALS BY A FOUNDING FATHER CONTRIBUTIONS OF THOMAS JEFFERSON TO AMERICAN IDEALS Thomas Jefferson is the third President of the United States and is famously known as the author of Declaration of Independence. He was interested in writing and music and was also a philosopher, scientist, politician and architect. Three of his most significant contributions to American ideals are The Declaration of Independence, the acquirement of Louisiana Purchase and naissance of the University of Virginia. Being a delegate in the second Continental Congress he was elected by the committee to draft the...
3 Pages(750 words)Essay
The Founding fathers of America
...The Founding fathers of America There is resonance in all the individuals who are considered as the founding fathers of the United States of America. These leaders were both political as well as statesmen. The founding fathers of the US did participate in several issues that attributed to the enormous achievement and strides that America has made in term of liberty, democracy equality and fairness (Holmes 46). The achievement realized by the American today is a culmination of their participation in the revolution that saw almost thirteen nations breaking from the bondage of the British Empire-America being one of the nations (Holmes 112). The result of the revolution was the declaration...
2 Pages(500 words)Essay
Joseph Ellis's Founding Brothers
...s Ellis, Joseph J. Founding Brothers: The Revolutionary Generation. , 2000. Print. The book ‘Founding Brothers: The Revolutionary Generation’ is written by Joseph Ellis. Joseph Ellis is a history professor at Mount Holyoke College who even received a Pulitzer Prize for writing the book. The book narrates an interesting account of dialogue held amongst a group of people who were both gifted as well as flawed. These aren’t any ordinary interactions, rather quite complex ones which had an immense impact in the early development episodes of the United States of America. It has also been noted that the technique used in the book has been borrowed from a classic study of Lytton Strachey i.e. The Eminent...
3 Pages(750 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Let us find you another Essay on topic Founding of Finance Essay for FREE!
Contact Us