evaluation of CAPM using American stock market data - Dissertation Example

Only on StudentShare

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. ...
Download paper

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

Related Essays

Monetary Policy and the Stock Market
Stock market fluctuations often decide the financial state of an economy. These, in turn, could act as the decisive forces behind the monetary policy framework of an economy. Movements adapted by stock market indices often reflect the behaviour patterns exhibited by many essential economic variables. Stock market indices might be regarded as a mirror image of the way their components behave over time. In case that these components exhibit an average upward trend, the implication is that of a rising stock price index, while they display a downward trend implies the stock prices moving down on...
24 pages (6024 words) Essay
Event study for efficient market hypothesis ex dividend data
The intention of this study are efficient market hypothesis. The theory ‘efficient market’ was formulated by Eugene Fama in 1970. He described an efficient market as a market where at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. The efficient market prices represent the intrinsic value of the securities. Researchers have developed this hypothesis to be known as the Efficient Market Hypothesis (EMH) which...
11 pages (2761 words) Dissertation
Stock Market Efficiency
One of the most famous and talked about theories in this regard is of Efficient Market Hypothesis. Because information is available to all the investors who are currently in the stock market therefore everyone would be able to predict the price of the stock and how these prices would vary in future as well. As everyone will be having information therefore there would be no advantage to any investor. An efficient financial market has been defined as the one where prices are able to completely reflect the available information . When it comes to efficiency of stock market or financial market,...
6 pages (1506 words) Essay
STOCK EVALUATION
The company’s stocks are traded at New York Stock Exchange and it also forms one of the companies in Dow Jones Industrial Average, and the S&P 500. The company’s total revenue for the year 2011 was over USD 67.41 billon with a net operating income and net income of USD 12.75 billion and USD 11 billion respectively. Its total asset and equity for the year 2011 was USD 189 billion and USD 81.19 billion respectively. Between the year 2000 and 2011, the company has regularly paid dividends to its shareholders, quarterly, with Average dividend of 0.19, Maximum dividend of 0.32, and Minimum...
6 pages (1506 words) Assignment
Stock Market
The essay covers how the investor should invest the above amount, what reasons the investor has for choosing the stocks and the manner of investment. Also included in this essay is the detailed but precise analysis of the stock selected by the investor. The essay present analysis of the company whose stock has been purchased by looking at the historic performance of the company based on stock prices and the risk rates to which any prospective investor must pay attention. The essay concludes by indicating with a clear support whether the investment made would be profitable or not, and if...
2 pages (502 words) Essay
Evaluation of the Capital Asset Pricing Model (CAPM) Using Chinese Stock Market Data
23). It is worth noting that numerous empirical studies that have conducted in line with evaluating the model have proved to be in harmony with the CAPM principles; nonetheless, some of the similar evaluations have contradicted the model. Therefore, this paper aims at studying if the CAPM principles hold for the China Stock Exchange. Among other things to be included in the analysis, include: i. Whether higher beta results to higher expected returns ii. Whether the zero or average intercept is equal to risk free rate and the SML slope is equal to the average risk premium iii. Whether there is...
42 pages (10542 words) Dissertation
CAPM
CAPM has theoretical limitation, which include impractical assumptions and instability of the beta values. The Arbitrage Pricing Model and Rolls have criticized the theory indicating that it may be unreliable and invalid. This study will examine the theoretical limitations and criticisms of the theory. Theoretical Limitations of the Theory The theory argues that all investors are risk avoiders and that the returns are normally distributed (Ma, 2011). This is not the case because investors are normally risk takers who are willing to make huge returns when their predictions favor them and lose...
4 pages (1004 words) Assignment
Got a tricky question? Receive an answer from students like you! Try us!