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evaluation of CAPM using American stock market data
Finance & Accounting
Pages 12 (3012 words)
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).
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. ...
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