### Related Essays

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)
Essay

What Is The CAPM (Capital Asset Pricing Model) And Of What Practical Use Is It? Investment Risk And Return: Concept Analysis.
On September 28, 2008 CNN reported, “The day's loss knocked out approximately $1.2 trillion in market value, the first post-$1 trillion day ever (CNN Money 2008 p. 1).” The above facts explain that investment in the security market is associated with the risk; sometime its magnitude is no less than the worst volcanic eruption or earthquake. The consequences of financial crashes create enormous damage in individuals’ plus country’s economic condition. Nevertheless, people keep investing in the security market. The primary reason is the opportunity of getting a good return from the...

9 pages (2259 words)
Essay

What Is The CAPM (Capital Asset Pricing Model) And Of What Practical Use Is It?
When the expected return of a security is determined using the model then it can be compared to the estimated return of security over a given time period. Such comparison will help the investor to analyse whether it is worthwhile investing into the security. CAPM was first conceptualised and pioneered by William Sharpe, Jack Treynor, Jan Mossin and John Lintner through their independent works (Focardi and Fabozzi, 2004, pp.86-87). The Capital Asset Pricing Model The Capital Asset Pricing Model (CAPM) is popularly used to price individual portfolio securities. The CAPM helps to determine the...

6 pages (1506 words)
Essay

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)
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

The Capital Asset Pricing Model
The equation that is applied in the calculation of CAPM for the assets is as follows: E(Ri) =RF +?i [E(RM) - RF] Where, E (Ri) = expected return of the ith level. Rf = risk-free return of an asset (such as short-term government securities), ?i = beta coefficient of ith level, and (RM) = Expected return on the market. The main aim of the CAPM model underlies the identification of the market portfolio as the tangency portfolio between supply and demand in balance. However, there are several theoretical limitations that have hindered the operations of the model, in the manner that these...

4 pages (1004 words)
Essay

Capital Asset Pricing Model
Usually, the overall volatility of the market is measures through proxies when implementing this model, for instance, the use of FTSE index. Such proxies are not usually the true measures of the market volatility which is at the core of the CAPM assumptions. Therefore, the model estimations from CAPM with use of market proxies for volatility can only predictions that are approximates and not the accurate measures of risk and return relationships. Another unrealistic assumption the CAPM model makes is the existence of a free risk security. In reality, there is not security that is free from...

4 pages (1004 words)
Assignment