## CHECK THESE SAMPLES OF The relevance of portfolio theory and the capital asset pricing model to an investor or fund manager in the equity markets

...? 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 assumptions of this...

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

...finance. Through this section, the authors address the misconception that the CAPM **theory** is applicable only to investment purposes. The application of **capital** **asset** **pricing** **model** together with mean variance analysis is greatly supporting corporate **managers** in decision making process today (Grinblatt & Titman 2003, p. 132). The author argues that a manger is most likely to lose his job if his organisation is continuously struggling with declining stock **prices** (ibid). Hence every corporate manger is forced to improve the firm’s stock **prices** at any cost. For this, the **manager** needs clear...

7 Pages(1750 words)Essay

...and they vary from one **investor** to another. Additionally, **investors** are not always holding a highly diversified **portfolio** of securities. The **market** indices of the securities **market** may not always diversify well. The **capital**-**pricing** **model** will not explain **investors**’ behavior and the beta might fail in capturing the risk of investment in real life practice due to these factors. Therefore, the **model** fails to act as a uniform and efficient valuation **model** in a real practical situation. The **model** only works in a generalized situation that is...

4 Pages(1000 words)Essay

... that is linked to validity is the fact that empirical studies on CAPM **model** have used actual past data and not expected **prices** to test the **model**. This introduces bias and there is need to use expected **prices** to test the **model** to examine its validity. Another assumption of **capital** **asset** **pricing** **model** is that betas are assumed to remain stable over time. This is not possible. From the **model**, beta is a measure of future risk of securities. **Investors** on the other hand only have past data of share **prices** and **market** **portfolios**, and not future data. Beta can therefore only be estimated from past data. When past data is used to measure beta, such beta can only be a reliable measure of future risk if it can remain stable over time... on the expected...

4 Pages(1000 words)Assignment

...is not genuine as it dominates participating **management** and investment study. Frank J. Fabozzi and Harry Markowitz states "even though the idea is not true it does not mean that the constructs introduced by the **theory** are not important. Constructs introduced in the development of **theory** include the notion of a **market** **portfolio**, systematic risk, diversifiable risks and beta."
Thesis Statement
The key logic behind is that the **investors** estimate the overall risk of the investments in the marketplace. Their preference is towards **portfolio** of investments rather than single investments. The fundamental **theory**...

8 Pages(2000 words)Essay

...of a cash-flow **model**. The results come in a familiar form: simulations of project cash-flows and representations of their statistics
**Capital** **Asset** **Pricing** **Model****Capital** **asset** **pricing** **model** (CAPM) is a theoretical **model** that ascertains the correct rate of return of an **asset**. It follows the condition that the **asset** is to be supplemented in a well-diverse **portfolio** and the **asset** has no-diversifiable risks. Using the security perspective, the security **market** line was used in connection to...

10 Pages(2500 words)Research Paper

...free rate. The eighth assumption deals with the homogeneity of the **investors**’ expectations which mean that all the **investors** have defined their relative period of investment in exactly the same manner. The final assumption withholds that all the **assets** are **marketable** whether they be financial or non-financial such as human **capital**.
**Portfolio** **Theory** & CAPM:
CAPM has its roots build on the **model** of **portfolio** developed by Markowitz in late 50’s. According to the Markowitz’s **model** of “Mean-Variance analysis”, the **investors** are risk averse and will prefer...

8 Pages(2000 words)Essay

...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(1500 words)Essay

...dependent on the Beta and the **equities** of the premiums in predicting the volatility of the stock that one can invest in. Mathematically, the CAPM is calculated with the as shown below:
Ra= Rf +Ba (rm – Rf)
Where:
Rf = Risk free rate
Ba = Beta of the security
Rm = Expected **market** return
Rm+ Rf = **Equity** **market** premium
According to Pahl (2009) most of the traders with stock they have embraced the predictability of the CAPM premium to know where it is worthy to invest in the stock. The CAPM **pricing** **model** consider simplification and the assumption such as there are no taxes or transaction cost, the **investors** in the stokes...

1 Pages(250 words)Assignment