## CHECK THESE SAMPLES OF CAPM

...on their securities in real terms. This means that investors face the risk of inflation, which reduces their earnings. This also indicates that the **CAPM** model is applicable in an ideal world, an occurrence that is impossible (Ma, 2011). Roll’s Critique of **CAPM** Roll criticizes the validity of the Capital Asset Pricing Model equation. The equation is as indicated below: E(Ri) =RF +?i [E(RM) - RF] Where E(Ri) represents the yield on security i. RF is the risk free rate of return. Bi is the market risk that security i faces. Roll’s first critique was that the model could not be tested using current data because it is constructed based on historical data. The impossibility of testing the model arises from the...

4 Pages(1000 words)Assignment

...fic risks of assets, but on the systematic risk of a portfolio.
This conclusion was mathematically expressed in Security Market Line (SML) equation:
ERi=Rf + (ERm – Rf) β,
where ERi is the expected rate of return on asset i, Rf is a risk-free rate, ERm is the expected rate of return of the market portfolio, and β is systematic risk. As can be seen from the SML equation, excess return depends on beta alone and not on systematic risk plus specific risk. Moreover, the connection between rate of return and beta is linear for portfolios.
Obviously, **CAPM** was designed as a way to determine prices of assets in market portfolios. Indeed, given a systematic risk value and asset’s expected rate of return investor can adjust the price of an asset...

10 Pages(2500 words)Essay

...to decide on the investment portfolio at time t-1 with an expected return at time t. Since the investors are assumed to be risk averse, the data that they care about are the mean and the variance of their one period investment return. “As a result, investors choose “mean-variance-efficient” portfolios, in the sense that the portfolios: 1) minimize the variance of portfolio return, given expected return, and 2) maximize expected return, given variance. Thus, the Markowitz approach is often called a “mean-variance model” (Eugene F. Fama).
The **CAPM** is principally based on the measurement of systematic risk and its affect on required returns and share prices. (Investopedia, 2009)
The **CAPM** model can be translated into the following formula:...

2 Pages(500 words)Essay

...returns and the probability distributions of the future returns on risky assets as being exogenous.
In this paper, I seek to give an in-depth understanding of this model by delving into the logic behind it, exploring critiques levelled against it, and explaining why it is still the model of choice in financial analysis. Finally, I give practical examples of its practical application that show evidence of its usefulness and continued use to date.
On What Logic is the **CAPM** based?
The **CAPM** is built on the portfolio model that Harry Markowitz (1959) developed. In the model, a portfolio is selected by an investor at time t-1 which at t produces a stochastic return. Investors are assumed to be risk averse and, in their choosing among...

6 Pages(1500 words)Essay

... to be identified for **CAPM** equilibrium to be achieved (Madanoglu 2013). The assumptions include the fact that investors must have the same expectations and also apply similar input list, they also have to maximize their estimated utility of wealth, the investors have to plan for a homogenous holding period, no transaction costs or taxes are incurred, the rate of borrowing equals the rate of lending and that there exists an environment where there is availability of numerous investors each having an endowment of wealth that is small in comparison to the whole endowment.
Concepts
When the model was developed, a variety of empirical tests were conducted on the model by using proxies and a number showed that the model was unsuitable...

7 Pages(1750 words)Essay

...on
From the explanation above, it is clear that the models of APT and **CAPM** depend on the publicly available information concerning the returns and level of risk inherent in specific securities (Watson and Head, 2007). Therefore, the models do not specify any particular information that investors should use regarding their investment decisions but assume the investor will use the most current information available in the market concerning the different securities, thus, helping them choose the best investment strategies.
Model with Stronger Assumptions
The proponents of the APT argue that the model is the best alternative to the **CAPM** because it has more assumptions requirements that are flexible (Reilly...

4 Pages(1000 words)Essay

.... It consists of an average rate of risk calculated by the investors in the market who are acquiring similar asset. The information of risk observed in similar types of the asset in the market will help the investor to get a true picture towards acquiring the asset. The observed risk factors will help in determining the real value of that asset (Kerzner & Saladis, 2010).
By subtracting the risk rate of an asset from expected return, the investor would get an idea of the real price of an asset.
Assumptions
Assumptions that are to be taken in **CAPM** pricing model are
There are many small investors who are the price taker. There is no tax on the asset. Investment should be of public related assets for example: shares and bonds. All...

4 Pages(1000 words)Essay

... to these mentioned fields, the paper aims at concluding with regard to the relevance of **CAPM** for corporate managers (Fama & French, 2003).
Assessment of **CAPM’s** Answer to the Risk-Return Relationship
**CAPM** is valued high owing to its ability to guide investment projects through accurate calculation about the relationship between the risk and return. This relationship provides two major functions. First, it serves as a standard regarding the rate of return for assessing the potential investments and second, it helps generating a cultured guess, rather than a biased one, with regard to return on assets, which have not been traded in the market place. The common concept behind **CAPM** is that investors must be remunerated in two ways, i.e. time...

4 Pages(1000 words)Assignment

...of the asset. Ra = rf + Beta (rm –rf).
Where ra is the asset price
rf is the risk-free rate of return,
beta is the risk premium
rm is the market rate of return.
For example in the market, the risk free rate =4%, the beta of the stock = 2 and market return is 12% over time, the expected return of the stock will be 4%+2(12%-4%) =20%. The beta, therefore, provides an answer to the risk return relationship.
Does **CAPM** provide a good account for pricing a firm’s debt or equity?
**CAPM** model provides a vital account for pricing the debt and equity. This is because it takes into consideration factors like risk free rate that is the rate of return for investment that has a zero risk and firms risk premium which is the expected return on a...

4 Pages(1000 words)Assignment

... 1952).
Explain in detail what is meant by an efficient portfolio, and argue why a high risk-high return portfolio is not necessarily better than a low-risk, low-return portfolio.
The concept of the efficient portfolio can be well understood after revisiting the preceding portfolio management theories. One such theory is the famous capital assets pricing theory (**CAPM**). The **CAPM** is a model that shows the association between the required rate of return and the risk on assets that are held in a portfolio that is well diversified. According to Fama and French (2004), the origin of the capital asset pricing model is the prominent work of William Sharpe (1964) and John Lintner (1965). The **CAPM** model is very useful in activities...

6 Pages(1500 words)Coursework

...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, most preferred investment and factors that contribute to the saving the investor will prefer will be focused on. To start with, we will understand the concept of an efficient portfolio as described below.
Efficient portfolio concept
Most investors, according to mean-variance analysis and asset pricing model, tend to invest...

6 Pages(1500 words)Assignment

...to the **CAPM**, investors are compensated for taking risk and so as to capture the element of time value of money in valuation of risky assets. The risk free rate captures the time value of money in the above formula.it shows how an investor ought to be invested for putting resources in a certain investment over time. Beta is a measure of risk in the model2.
The decision rule in the model is that an investment is only undertaken when the expected return meets required return in an investment3. A security market line shows the relationship between **CAPM** results and various risks in the capital market. Risky assets are the assets which are traded in the asset market. Risk free assets refer to the process of...

7 Pages(1750 words)Term Paper

...Finance and Accounting October Finance and Accounting 5. If you had to choose an investment proportion in these two securities, what would you choose? Why? Explain your choice in terms of **CAPM** theory.
If I had to choose an investment proportion in these two securities, I would choose 0.6 Wcoke and 0.4 Wmerck which has a portfolio return of 0.010936 with a Standard deviation of 0.062737 if I wanted a minimum variance portfolio. The proportion which occurs in the efficient frontier ensures minimum risk that is measured by the variance of its returns and is my minimum variance portfolio. If I wanted a portfolio with maximum risk, I would choose proportion with 0 Wcoke and 1 Wmerck with portfolio return of 0.011146 and...

1 Pages(250 words)Article

... premium
Rm = Expected overall market return rate
(valuebasedmanagement.net, 2011)
APT Re = Rf + (Individual risk factor premium*Relationship between the factor and price) + (Individual risk factor premium*Relationship between the factor and price)
Generally, these two methods are different in that one (**CAPM**) uses beta- which is the risk factor of a given stock in relation to that of the market. Therefore, if beta equals 1 this stock is equally risky with the market, if it is 2 the same stock is twice risky in comparison to the market. While on the other hand, APT utilizes individual factors in place of beta. Also APT does not apply the market return rate and thus considered to be more particular to a given stock...

5 Pages(1250 words)Research Paper