## CHECK THESE SAMPLES OF A central assumption made in Mean-Variance Analysis and the Capital Asset Pricing Model (CAPM) is that investors prefer to invest in the most efficient portfolios available

...? and Section # of **Capital** **Asset** **Pricing** **Model** is a tool extensively used to value **assets** in the financial sector. It has been extensively used in calculating the required return of **investment** products. The **capital** **asset** **pricing** **model** was introduced in the 1960s by William Sharpe; since then it has been considered as the cornerstone of predicting the required return on an **investment**. Required Return: Risk free rate + ? (Average Market Return –Risk free rate) Where ? is the beta value of the financial **asset** The basic...

1 Pages(250 words)Essay

...required for taking the risk in **investing** the stock.
Thus, required rate (RR) is given as
RR = risk free return + β (RM-RF)
= 3+ 1.7 (10-3) {Beta for the industry under calculation is 1.70}
= 15
That is how required rate of return was assumed as 15% (Dividend Growth…)
Arbitrage **Pricing** Theory – APT
This theory was propounded by Stephen Ross in 1976. This theory has more flexible **assumptions** to describe as and taken as an alternative to (**CAPM**) **capital** **asset** **pricing** **model**. In contrast to **CAPM**, which takes into consideration market's expected return, APT takes into...

5 Pages(1250 words)Research Paper

... unit to the losses for which an **investor** is liable. The second **assumption** was based on the homogeneity of expectations. All the **investors** hold the same expectations, since all have the same **assets**, information and are risk averse. There also exists at least one **investor** who believes that returns are generated by the arbitrage **model** and is not negligible. The arbitrage theory overcomes the **mean** **variance** theory in that it does not require the strict conditions of homogeneity of the anticipations (Ross, 1976). According to the **capital** **assets** **pricing** **model**, an **investment** carries systematic risk- associated with its existence in the market and is also referred to as beta. Unfortunately, this risk cannot be diversified. The other... is the...

5 Pages(1250 words)Essay

...measure of risk relative to the market **portfolio**. ? measure the volatility in the share **price** or share **portfolios** which are relative to the movement to the returns on the market **portfolio**. ? is used widely in the **investment** management as a standard measure of risk. As mentioned before that the relationship between ? and market returns signifies that the **investors** expect a market return to be equal to the risk free rate in addition to the risk premium. Implementation of the **CAPM** **model** requires the parameters to be assumed. The various components of the **CAPM** **model** are as...

7 Pages(1750 words)Essay

... on the expected return and **variance** of **asset** returns while the APT sees no need to make this **assumption** as **investors** depend only on the expected returns and **variance** of return. The APT **model** does not require the **assumption** of normal distribution of returns. The APT **model** is satisfied as long as the arbitrageurs in the market make **prices** approach the equilibrium, while the **CAPM** is satisfied when all **investors** select **efficient** **portfolios** only. References Buckle, M. and Beccalli, E. (2011) “Principles of Banking and Finance”, University of London: London Grinold, R.C. and Kahn, R.N. (2013) “Active **Portfolio** Management: A Quantitative Approach for Providing Superior Returns and Controlling Risks”, McGraw-Hill: New York... ?Discuss the main...

4 Pages(1000 words)Assignment

... **pricing** **model** is one option that **most** financial analysts **prefer**. The succeeding discussions will tackle on the use of **capital** **asset** **pricing** **model** as basis for discounted multi-period risky cash flows.
**Capital** Budgeting **Models**
The prevalence of **investments** has led to several ideas particularly on the side showing benefits attributed to such activities. For **investors**, it is important to determine the exact amount that will be gained from the **investment**. Essentially, there were several methods developed to address this need. Taggart (1999) created **capital** budgeting **analysis** **model** that makes use of the discounted cash flow. Accordingly, this **model** enables **investors** to forecast the values of cash flow components. Among the **models**... well...

10 Pages(2500 words)Research Paper

...Line and provides a return greater than that of required to offset the systematic risk (Sharifzadeh, 2010).
Not Viable in Reality
The argument against **CAPM** emanates mainly from the pre-suppositions about it. Several of these are removed from reality. While some of them may seem to be plausible, e.g. **investors** wanting to maintain well-diversified stock **portfolios** that fairly represent market conditions and to derive the benefits of taking smart risks, the other **assumptions** are arguable. Real world **capital** markets are far from being perfect and the **price** of **assets** may be incorrect.
Following is a list if the...

8 Pages(2000 words)Essay

...Finance and accounting [Insert al Affiliation] **Efficient** **portfolio** It is an optimal **portfolio** in the market that offers the expected rate of returns that are high with the lowest standard deviation (risk) involved. **Investors** **prefer** the lowest standard deviation because of the axiom **CAPM** **model** that states that **investors** fear risks **most**, and they are, therefore, careful when making their **investment** choices. Normally, they devote their due care on the average and deviation of their returns from the **investment** to minimize the deviation of the return on the...

5 Pages(1250 words)Essay

...**ASSUMPTION** **MADE** IN **MEAN**-**VARIANCE** **ANALYSIS** AND THE **CAPITAL** **ASSET** **PRICING** **MODEL** (**CAPM**) By Foundation Department of High-risk high return versus low-risk low-return **investment**
Introduction
**Asset** **pricing** **model** (**CAPM**) is a **model** used in the determination of return rate on **assets**. The **asset** sensitivity, diversifiable and non –diversifiable factors are looked into. In this chapter, the risk associated with **investment**,...

6 Pages(1500 words)Assignment

.... William Sharpe **made** several **assumptions** for **investors** in creating market equilibrium in order to validate the **CAPM** **model** (Sharpe, 1964). The **model** develops the **price** of an **asset** which it must hold in order to satisfy the **investors** for holding the current market **portfolio**.
According to **CAPM**, everybody bears the same risk in different quantity. As the systematic risks is removed and the **investors** hold diversified **portfolios**, they will have a need for return and according to the utility function, the **investor** will rank the **portfolio**. All the **investors** will tend to buy the market **portfolio** as everybody possesses the same **portfolio** comprising of risk bearing **assets**. Furthermore, by purchasing several other **assets**, it is possible... average...

7 Pages(1750 words)Essay