Financial Management - Essay Example

This paper discusses on whether the capital asset pricing model offers the right evidence on where investors can get value for their money. There are two types of risks that any investor is afraid of and should take into account when planning to capitalize in a given market. These include the systematic and unsystematic risks (Resource Center, 2013 n.p). The systematic risk is that which is related to the whole market and over which the investor has not control. This type of risk has a huge impact on the amount of returns that an investor should expect.

The CAPM discloses this type of risk to the investor and makes him aware on what to expect (Resource Center, 2013 n.p). It includes the recession, the dynamic nature of interest rates and other natural phenomenon that the investor would have no control over. The unsystematic risks, on the other hand, are specific to investments and can be handled by the investor. He is aware of this kind of risk and has planned for it. According to the capital asset pricing model, beta is the measure of the risk that any stock investment is exposed to (Shapiro, 2006 p7).

It shows the relationship between the market and the stock by showing how the dynamic change in the market affects the returns from the stock investment (Shapiro, 2006 p7). It is done, over a certain period of time, to determine how the up and down movement of the market affects the up and down movement of the stock prices. Therefore, beta provides the much needed answers to the risk-return relationship (Shapiro, 2006 p15). Equity is all that remains after all the expenses of an investor have been completely taken care of, and when all the expenses have been settled, and there is residual remaining of the assets (Perold, 2004 p12).

The capital asset pricing model does a return-risk assessment of the financial securities of an investor and concludes that equities are the most risky assets, and their premium is very high (Perold, 2004 p13). The CAPM says