Capital Asset Pricing Model - Research Paper Example

Only on StudentShare

Extract of sample
Capital Asset Pricing Model

"As a result, investors choose "mean-variance-efficient" portfolios, in the sense that the portfolios: 1) minimize the variance of portfolio return, given expected return, and 2) maximize expected return, given variance. Thus, the Markowitz approach is often called a "mean-variance model" (Eugene F. Fama).
This figure gives a clear picture of the CAPM. Its horizontal axis shows the portfolio risk which is measure by the standard deviation of portfolio return. Its vertical axis is the expected return. The curve is the minimum variance frontier which "traces the combination of expected return and variance at different levels of expected return" (Eugene F. Fama). This shows the obvious trade-off between risk and expected return.
"At point T, the investor can have an intermediate expected return with lower volatility. If there is no risk free borrowing or lending, only portfolios above b along abc are mean-variance-efficient, since these portfolios also maximize expected return, given their return variances" (Eugene F. Fama).
EM applications. ...
Download paper


Whenever a company invests in a new project or when an investor invests in some shares, there is always some risk involved (unless the investment is made in risk-free securities such as "gilts"). However, a company can also reduce its overall exposure to such investment-related risk if it invests in a number of projects with the view that even if the more risky projects perform badly, the less risky projects will cover up for the loss, resulting in an average return from the portfolio that is pretty much closer to what company expects i.e…
Author : lockmancody

Related Essays

Capital Asset Pricing Model. Pro and Contra.
An estimation of this profit is based on forecasts of the future taking from the investment....
7 pages (1757 words) Essay
Asset Pricing Issues
are likely to remain the subject of legitimate interest far into the future. In other words, they will continue to be useful in helping us understand not just financial markets but also human behaviour and psychology. An example of the many issues facing researchers is the shape of the security market line which, according to the capital asset pricing model, reflects the most efficient portfolio that would give the best return for a certain level of risk. As recounted by Campbell (2000, 1528-29), changes in the slope of this line led to several hypotheses that were attempts to discover the...
4 pages (1004 words) Assignment
Capital Asset Pricing Model (CAPM) Vs. Arbitrage Pricing Theory (APT)
The model derived rate of return will then be used to price the asset correctly - the asset price should equal the expected end of period price discounted at the rate implied by model. If the price diverges, arbitrage should bring it back into line. The theory was initiated by the economist Stephen Ross in 1976.(Ross,1976) If APT holds, then a risky asset can be described as satisfying the following relation:...
5 pages (1255 words) Essay
"The Capital Asset Pricing Model (CAPM) isn't wrong. It just doesn't go far enough." Discuss.
The cpitl sset pricing model (CPM) theory ssumes tht n investor expects yield on certin security equivlent to the risk free rte (sy tht rte chievble on six-month Tresury bills) plus premium bsed on mrket vribility of return X mrket risk premium. In Winter 1991, the mrket risk premium on listed U.S. common stocks ppers to hve been bout 6.5%, ccording to sttistics published in the Qurterly Review, Winter 1991, by the Federl Reserve Bnk of New York (though the Ibbotson study found it to exceed 8% from the mid 1920s through 1987). Thus in period of 4% infltion, the T-bill rte might be ppropritely...
8 pages (2008 words) Essay
Critically analyse the relative merits of the capital asset pricing model (CAPM) and empirical approaches to asset pricing (such as the Fama and French model)
The CAPM is the graphically represented by the security market line (SML), which shows the expected rate of return for the individual security as a function of systematic risk (indicated by the beta of the security). The SML is shown in the following figure....
8 pages (2008 words) Essay
Critically analyse the relative merits of the Capital Asset Pricing Model and empirical approaches to Asset pricing (such as FAMA and French model)
The basic essence of the model is that it determines the amount of return that an investor is going to earn for putting their money at risk....
6 pages (1506 words) Assignment
about "Capital Asset Pricing Model"
CAPM holds that investors are operating in a perfectly capital market and all securities are valued accurately. If we plot the returns on the Security Market Line than none of the returns will be above or below the SML Line. A perfect capital market assumes that information is freely available to all the investors who have homogenous expectations....
8 pages (2008 words) Essay
Got a tricky question? Receive an answer from students like you! Try us!