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The assignment is in three parts:1 Outline and explain the Capital Asset Pricing Model (CAPM) (40%)2. Show how the Capital Asset - Essay Example
Author : trompelwyn
Finance & Accounting
Pages 6 (1506 words)
Capital Asset Pricing Model Capital Asset Pricing Model Introduction This report would make the readers understand what Capital Asset Pricing Model (CAPM) is and how it is used for decision making by the corporate sector…
William Sharp introduced the model in 1964.Corporate sector uses CAPM in order to identify the required rate of return on assets deployed to achieve organizational objectives. In order to effectively implement CAPM, the corporate sector is required to take into account, the sensitivity of the assets to the symmetric or market risk. The symmetric risk is identified within CAPM equation as beta (?). Keeping in view the logical relationship of CAPM with business related decisions, beta (?) helps the corporate sector to determine the investor’s cost of capital equity acquired. Other factors that CAPM takes into account are expected return of market on the assets deployed and the expected return on risk-free assets deployed (Kurschner, 2008; Fama & French, 1995). As corporate sector uses CAPM for placing a price tag over its securities and other elements in the portfolio, the baseline for developing a formula for CAPM starts with security market line (SML). When the formula is employed on the costing of assets, the outcome reflects how the market would perceive the costing of individual securities with respect to the security risk class. In this manner, reward-to-risk ratio can be calculated. ...