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Pairs Trading And Strategies And The CAPM
Besides testing a model, this study will also be testing market efficiency and using use Cointegration as a decision rule for pair selection, try to ascertain whether different and more efficient rules may be implemented. In order to calculate asset returns we need the Capital Asset Pricing Model (CAPM) which gives predictions on how to measure risk and the relationship between risk and return. The relationship of expected return is linear and is necessary to explain differences in returns among securities. Introduction Pairs trading include tested methods used to identify and invest in pairs....

20 pages (5020 words)
Dissertation

The cost of equity capital and the CAPM
The three most popular methods include: dividend growth model, capital asset pricing model and the arbitrage pricing model. Dividend growth model Organizations utilize the cash generated for two purposes: they either reinvest it in the growth or new projects of the organization or pay some amount as dividend to the common stockholder. The Dividend growth model is based on this premises that a shareholder of the organization will want both dividend as well as capital appreciation while holding the stock. The cost of equity in this case can be given as (Weaver and Weston, 2004, pg.282): Where, R...

4 pages (1004 words)
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Investing in Portfolios and CAPM
If the investor chooses alternative 1 and invests all the money in Evergreen, then he can earn a return of 13.8%. Since Evergreen is a safe company, therefore the standard deviation of returns is quite low and risk coefficient is only 0.11. One must keep in mind that by investing in this company, the investor is foregoing chance of earning high returns. In other words, the investor is foregoing chance of earning high returns for increased safety by investing in this company. On the other hand, in the case of alternative 2, if the investor decides to invest in more dynamic of the two companies...

8 pages (2008 words)
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The Capital Asset Pricing Model (CAPM)
However lending has an interest rate attached to it. In the open market, it is also assumed that traders have all relevant information rates of stocks and other co-variances. Traders in an open market are also assumed to be rationale about being risk averse and all investors have same assets to choose from given all information concerning the assets and same decision methods are applied (Burton, 1998). This brings us to the concept of the capital asset pricing model (CAPM). The model is very useful and is widely used in the industry, although it is based on very strong assumptions. This paper...

5 pages (1255 words)
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CAPM (Capital Asset Pricing Model) and Its Practical Use.
It is carried out through a properly designed and professional model that does not require to be completely renewed on a case by case basis. It has, therefore, met the requirements of the Asset Management industry in which the capacity to correctly price securities, and to properly infer the right rate of return. These are used to determine traditional and innovative alternative assets and provide all qualities that can make possible for a portfolio manager to gain an early lead over competitors (Brigham and Houston). The model, from a technical perspective, has been based on the works of Dr...

8 pages (2008 words)
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CAPM (Capital Asset Pricing Model)
and expected returns which is denoted as r. The ? is used as a measure of non diversified risk and implies that the expected return is the return on a risk free asset in addition to a risk premium (Laubscher, 2002). The risk premium will be equivalent to the market return in surplus of the risk free rate which is multiplied by the share portfolio. This is the reason that ? is regarded as the difference between the returns on various share portfolio. The formula for CAPM model is denoted below: R = Rf + ?(Rm - Rf) R = Expected return on the share/portfolio. Rf = Risk-free rate of return. ? =...

7 pages (1757 words)
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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...

12 pages (3012 words)
Dissertation