StudentShare solutions

# Evaluation of CAPM using American stock market data - Dissertation Example

## Extract of sample Evaluation of CAPM using American stock market data

So investors prefer to choose mean-variance-efficient portfolios that would either minimize variance with a given expected return or would maximize expected return given variance. Thus, CAPM is a theory that defines the relationship between risk and the expected return of a security or a portfolio of securities. The theory is based on the assumption that the security market is generally composed of risk-averse investors and the type of investors who prefer and will to take more risk only when they expect to earn a higher return in commensuration with that risk. The return from an asset varies through successive periods and an asset which has a fluctuating return is considered to have greater risk. So, the tendency of investors is to diversify their investment portfolio so that they could minimize the effect of risk volatility, i.e. the unsystematic risk attached to the portfolio. Thus due to diversification only market related or systematic risk is relevant in the risk-return trade-off. The portion of risk volatility which is systematic, i.e. measured by the extent to which return varies with respect to the overall market, is measured by the parameter ? (Beta). Beta is a measure of risk contributed by individual securities to a well-diversified portfolio, and measured by- rA = return of the asset rM = Return of the market ?2M = variance of the return of the market cov(rA, rM) = covariance between the return of the asset and the return of the market. Beta is calculated with the help of historical returns for both the asset and the market. Assumptions of CAPM The assumptions of CAPM are- Investors in the market are concerned only about the expected return and the volatility of risk involved with their investment All investors have homogeneous idea about the concept of risk and return associated with an investment. Systematic risk factor is common to a broad-based market portfolio as systematic risk brings volatility which is non-diversifiable. So, if a securities beta can be identified, then the expected return from that security can be calculated. Economic Rationale behind CAPM and its Consistency with the regulatory and the economic standards The relationship in risk and return in CAPM is measured using- Where, Rt = the expected return on a security or a portfolio Rf = Risk-free rate of return ?i = Beta of the security or portfolio i Rm = expected return on the equity market performance The rationale behind the CAPM equation is to persuade the investors to shift their money from riskless assets to risky assets such as equity security. The usefulness of CAPM lies in the measurement of the expected return premium appropriate for an investment with respect to the risk involved relative to the market index risk. The economic explanation of the equation brings out that how risk-free rate of return (Rf) and market-wide risk premium (Rm- Rf) aid to persuade investors from investment in risk-free securities to risky securities. ...Show more

## Summary

Evaluation of CAPM using American stock market data Table of Contents Table of Contents 2 Introduction 3 Description of CAPM 3 Assumptions of CAPM 4 Economic Rationale behind CAPM and its Consistency with the regulatory and the economic standards 4 Role of CAPM in estimating Cost of Equity 6 Implications of empirical Tests of CAPM 6 Regression Analysis- A tool for employing the CAPM 6 Critique of CAPM 7 Evaluation of CAPM using the US Stock Market 7 Conclusion 9 References 14 Introduction Description of CAPM William Sharpe (1964) and John Lintner (1965) have contributed to the origin of asset pricing theory in the Capital Asset Pricing Model (CAPM)…
Author : warren49
Save Your Time for More Important Things
Let us write or edit the dissertation on your topic
"Evaluation of CAPM using American stock market data"
with a personal 20% discount.
Grab the best paper

### Check these samples - they also fit your topic

Stock Market Efficiency
This academic proposal is being carried out to discover and establish whether the UK stock market is really efficient and to identify the trends in the UK stock market. From having a glimpse at the capital market from all over the world, UK capital market is one of diversified exchange marketplace that have come under consideration from the evaluation in the research.
33 pages (8250 words) Dissertation
Event study for efficient market hypothesis ex dividend data
The purpose of this research is to study the effect of ex-dividend declaration on stocks listed in India. This will help in analysing the efficiency of the Indian Stock Market. In addition, it will also provide food for thought to the policy makers in order to increase the market efficiency and thereby capital inflows.
11 pages (2750 words) Dissertation
Stock market efficiency
Stock market efficiency. Efficiency in market means that there is absence of any systematic way to beat the market. The efficient market hypothesis states that the information about the value of the firm is fully reflected in the current stock prices. It also states that the firm will not be able to earn to excess profits i.e.
13 pages (3250 words) Dissertation
The empirical relationship between accounting disclosure and stock market return using portfolio analysis and managerial behavio
Besides the opportunity for portfolio diversification, investors prefer stocks in international markets due to a number of other factors like high returns, favorable laws etc. Irrespective of their geographical location, investors remain vigilant over the prospects and performances of the companies they have invested in.
10 pages (2500 words) Dissertation
An analysis of the risk-free rate in the South African capital market
The research was conducted by using a literature review and a desk research based analysis of the market price based yield curve. The literature review was conducted to establishe the importance of the risk free rate in the financial systems dynamics. It was highlighetd that all the portfolio theoies and performance measures indicators have the risk free rate at the core of their methodology.
90 pages (22500 words) Dissertation
Evaluation of the Capital Asset Pricing Model (CAPM) Using Chinese Stock Market Data
Since the introduction of the Capital Asset Pricing Model (CAPM), a series of different efforts have been demonstrated towards evaluating the validity of the model. These evaluation and analyses have been a unique breakthrough and a significant contribution to the finance economics globally (Vialar, 2009; Pg.
42 pages (10500 words) Dissertation
Emprical evaluation of Value at Risk(VaR) model using the Lusaka stock exchange
DECLARATION I, Leonard Mwango Chungulo, do declare that this work is my own and that the work of other persons utilized in this dissertation has been duly acknowledged. This work presented here has not been previously presented at this or any other university for similar purposes.
10 pages (2500 words) Dissertation
Ghana Stock Market
To illustrate how a stock market operates and spreads the wealth in one country, let us say Company-A has been so successful in its manufacturing operations that all its goods sell as fast they are produced. The firm knows that it could sell even more products if it could get enough money to build another factory.
59 pages (14750 words) Dissertation
Stock Market Index in China

The author states that financial market reforms were central to China’s commitment to the World Trade Organization, in which China became a member in 2001. Following China’s WTO membership, international investors gained easier access to the financial market. The Chinese government is trying to change the function of the two existing stock exchanges.

22 pages (5500 words) Dissertation
Efficient Market Hypothesis Of Thai Stock Market
This study needs to address the hypothesis testing whether SET50 and SET100 Indexes follow the random walk or not. Level of the efficiency of Thailand stock exchange market is also determined for a period of four years. It also aims to investigate the impacts of external as well as internal factors on SET50 and SET100 Indexes.
62 pages (15500 words) Dissertation
Hire a pro to write