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
