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What Is The CAPM (Capital Asset Pricing Model) And Of What Practical Use Is It? Investment Risk And Return: Concept Analysis. - Essay Example
Author : isadorekilback
Finance & Accounting
Pages 9 (2259 words)
In 1929 stock market crash, investors in today’s money, lost $319 billion dollars. The Black Monday of 1987 was the largest one-day market crash in the history. The primary reason is the opportunity of getting a good return from the security market…
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 security market. For example, during 1992 – 2011, the average of returns of the S&P was 9.6 % (Forbes 2012). Regardless of stock market crashes many investors believe that leaving money in the high-yield saving accounts is not an investment at all. Nevertheless, investing money in the security market involves a significant amount of risks. The return of an investment is a function of risks; lower the risks lower the return, and higher the risks higher the return. Return and risk relationship at the conceptual level can be represented through a straight line shown in figure 1.An investment may encounter market risk, default risk, interest rate risks, liquidity risk, and political risks (Forbes 2012). These risks make an impact on the return of an investment. The capital asset pricing model studies the impact of risks on the return of an investment. ...