In order to apply the capital asset pricing model it is assumed that the investors are rational whereas the investors are not rational and all the investors does not have same information. There are cases in which the investors gets an inside information related to a certain investment and thus invests in that investment. One of the major limitation is that the investors can borrow or lend any amount for any period of time at the risk free rate which is not possible in practice as there are limitations and restrictions and it is difficult to determine the risk free rate for a long period of time as it is considered as the rate of the government securities which are considered to be least risky. Capital asset pricing model considers the assets to be perfectly divisible and is marketable which is not possible in all circumstances as there are not sudden markets available for all of the assets and securities and all the assets are not perfectly divisible. Capital asset pricing model considers that no transaction cost is incurred in the purchase and sale of the securities and thus limits the practical implication in which the transaction costs are bared by investors when buying or selling the securities (Fama & French, 2004). Task A (b) The lending and the borrowing rate is elaborated as in the Role’s Critique of the empirical tests of capital asset pricing model they explained that risk free rate is available when lending is done but this rate is not available when it comes to borrowing. Thus the limitation of capital asset pricing model is further elaborated regarding the risking free rate as the risk free rate is only available for lending as the government securities can be bought which is easy but the risk free rate cannot be charged when borrowing as it is not possible (Ansari, 2000). Roll’s critique determined the limitation of the possibility regarding the selection of market portfolio where the relation is to be determine between the systematic risk and expected return on security is to be linear and if that is not the case than the efficiency is not determined of the capital asset pricing model but it is of the chosen index and the linear relation can be determined from any portfolio and not just from the market portfolio. The empirical test of capital asset pricing model is just the efficiency of the chosen market index and thus the relation is just the linear function of measured betas and of the average returns. Roll elaborated that the true market portfolio is necessary so as to test the efficiency of capital asset pricing model where all the conditions of capital asset pricing model are satisfied but the determination of the true market is impossible thus removing the possibility of testing the capital asset pricing model. Task A (c) The arbitrage pricing theory determined that the expected return is not only the basis of the expected return on which the investors make the investment decisions. The decisions of the investment regarding the investment is not assumed to be based solely upon the expected return which is the limitation of the capital asset pricing model and thus addressing and eliminating the limitation of capital asset pricing model. Capital asset pricing model’s limitation of the normal distribution of the return is accounting for in the
Task A (a) In the capital asset pricing model there are assumptions which are made in order to apply the model. The assumptions of the model lead to many of the limitations of the model and circumstances where the application of the model is limited to a certain extent…
Therefore, if price increases the quantity demanded records less than proportional reduction. US beer industry and associated personnel entered into crisis when US government imposed additional federal excise duty and other taxes by naming as a luxury product.
Industry when in the infant state is not capable of meeting head-on foreign competition; however, given the time it is capable to flourish and can compete with international players. Short term protection helps industry to develop its comparative advantage.
In the long run the price will first rise from P1 to P2 and then adjust itself due to entry of more firms to P3 which is lower despite the increment in the quantity of oil demanded; hence Nadler-Kafferlin will be right (Taylor et al, p 261).
According to the author, efficiency of the company’s wireless business, and the company’s “U-verse phone, and internet, and television service,” and other products contributed to the better performance (Chen, 2014, p. 1). In recognizing
An example of oligopoly market structure is the health insurers.
Oligopolies and monopolies consist of large organizations in the market; they also hold considerable market shares over specific services and products in the industry.
ws a firm to acquire its target profits by charging different prices to its consumers without their knowledge because of the reduced level of transparency (p. 565).
Loss-Leader Pricing Strategy: The strategy occurs whenever a firm imposes reduced prices on the goods of
According to studies, like Ferris (2013) the concern as to whether a market can be termed as efficient or not is purposeful only when considered in relation to the types of market information. Investors who own few securities expect to upsurge their
8 pages (2000 words)Assignment
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