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Finance and Accounts. Accounting Principles. - Essay Example
Finance and Accounts. Accounting Principles.
Stock markets of late are very volatile and investors need to learn through various important concepts before proceeding to invest their hard earned money to ensure satisfactory returns…
These situations should at least be reduced if they cannot be reduced as a whole. The process of loss reduction involves a complex understanding about the following terminologies:
1. CAPM and Arbitrage Pricing Theory
2. Efficient markets hypothesis and Pecking order theory
3. Modigilani and Miller approach and Residual theory
4. Symbolic interactionism, ethnography and phenomenology
5. Conceptual framework of accounting and
6. Conceptual framework of management accounting.
These abovementioned theories explain the basics of share trading and knowledge of them is a must to avoid risk in the stock market.
CAPM and Arbitrage Pricing Theory
Capital Asset Pricing Model (CAPM): It was developed to predict the future value of shares based on the previous trends in market equilibrium. It establishes the underlying relationship between the returns expected in the light of unavoidable risk. Any investment can be classified into risk free or portfolio categories. It analyzes the return which a portfolio is expected to deliver in the form of a characteristic line which comprises of three primary measures – the alpha (α), Beta (β) and unavoidable risk. α is the simple intercept of the line and is bound to be zero and any value below that would avert the investor to participate in that particular stock. ...