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Capital Asset Pricing Model
This model has been heavily criticised and debated over the past decades, and many of the economists are of the opinion that this framework is not adequate enough to assess various risk factors comprehensively. However, none of the opponents could introduce a potential alternative to this concept till date. This paper will critically analyse the applicability of the CAPM in corporate finance applications in the context of modern business environment. Corporate applications of CAPM Hillier et al (2008, section 5.1) provide a detailed view of the corporate applications of the capital asset...

7 pages (1757 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...

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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...

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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...

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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...

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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