Estimating Beta () Under CAPM Model - Essay Example

For the sake of understanding, just imagine the example of the prices of stocks in the share market, they are highly volatile and keep on changing every day, hour, minutes and so on.... So to have precise knowledge of these prices one needs to have large quantum of data, in tens of thousands or in millions....

The capital asset pricing model (CAPM) is a model that establishes the equilibrium relationship between the risk and return on a risky asset.... This paper seeks to analyze the Jensen argument in 1978, quoted by Pike& Neale that the efficient market hypothesis is the “best-established fact in all of social science”....

Obviously, capm was designed as a way to determine prices of assets in market portfolios.... However, because of its ‘ideal' nature capm is often seen only as a theoretical tool.... Since capm introduction to nowadays SML equation became a topic of wide academic discussion.... Studies performed to assess the validity of capm can be divided into three general groups:... It was found that under these assumptions Tobin's (1958) super efficient portfolio (it consists of the risk-free asset added to Markowitz's portfolio on the efficient frontier) must also be market portfolio....

The Arbitrage Pricing Theory and the Capital Asset Pricing model do not owe its existence to a single person or a single effort, but was developed over the years by researchers' independent inquiry.... Originally, he was fashioning his paper after the present value model of John Burr Williams.... Halfway through, however, Markowitz realized that Williams failed to account for the impact of risk in his model.... The portfolio theory provides the basis of the capm and the APT, and it states that an optimal portfolio is the combination of assets that provides the investor the highest return for the least possible risk level for a specified return (Constantinides & Malliaris, 1995)....

The international capital asset pricing model (ICAPM) takes into account countries as stock lists in world market is founded on capital asset pricing model.... Previous experiential reports of international CAPM models did not find much proof to back up the model.... After (Sharpe, 1964) developed the capm theory several other researchers have developed the theory with giving importance to the diversifiable and non-diversifiable risks of different investments....

The paper "The Relevance of Portfolio Theory and the Capital Asset Pricing model " states that both portfolio theory and the CAPM are relevant for making investment decisions.... The capital asset pricing model (CAPM) is a model that establishes the equilibrium relationship between the risk and return on a risky asset.... The model has often been used by corporations during capital budgeting decisions to establish the appropriate discount rate for evaluating investments....

This case study "The Relative Merits of the Capital Asset Pricing model" critically analyzes the relative merits of the capital asset pricing model (CAPM) and empirical approaches to asset pricing (such as the Fama and French model).... The specific fact has been also used as a justification for doubting this model's value; the model of asset pricing developed by Fama and French is among those theories that most oppose CAPM....

nbsp;… The paper shows that research conducted has shown that the capm model can stand up on the criticism leveled on it by the advocates of other models.... The capm model has various advantages that make it popular over the other pricing models.... Under the capm model, an investor is rewarded for bearing the systematic risk of the security as this model assumes that the unsystematic risk can be diversified thus this model proves that there is no need for hunting for “Alpha opportunities”....