Asset Pricing And Portfolio Management Models

Fama and French’s three factor model attempts to explain the variation of stock prices through a multifactor model that includes a size factor and BE/ME factor in addition to the beta risk factor. Fama-French model essentially extended the CAPM (which breaks up cause of variation of stock price into systematic risk which is non-diversifiable and idiosyncratic risk which is diversifiable) by introducing these two additional factors. Fama and French find that stocks with high beta didn’t have consistently higher returns than stocks with low beta and this indicates that beta was not a useful measure under their model. Their model is based on research findings that sensitivity of movements of the size and BE/ME factor constituted risk, and

“The most dramatic event in the history of relations between Mexico and the United States took place a century and a half ago.” (Document C, Paragraph 1) The Mexican War started in 1846, and ended in 1848. President Polk and Texas agreed that the Texas-Mexico border was the Rio Grande River. But when President James K. Polk heard Mexicans were the first to fire upon Americans at Texas, America was prepared to go to war. The majority of Congress agreed on the war vote too. In the Senate, the votes were 40 to 2, and in the House of Representatives it was 174 to 14. “Restless spirits, discontented at home … joined them ….” (Document D, Paragraph 3) Though the Mexicans were the first to start the war, the Americans had a play in it too. There are many different perspectives on the Mexican War, and many people wonder if it was reasonable or not. One opinion is that the United States was unjustified in going to war with Mexico because America robbed Mexico, invaded Mexican territory, and took advantage of Mexico’s offers.

Some people suggest that everyone between the ages of 18 and 21 should be required to perform one year of community or government service. Such service might include the Peace Corps, Environmental Conservancy Corps, a hospital, the military, a rural or inner-city school, or other community outreach projects. I believe forcing the service of any group of people is a bad idea. In this case, three reasons come to mind as to what makes this idea bad. First, I see this as a form of indentured servitude, even though the folks may earn a paycheck. Second, I feel that this idea takes away from the idea of the United States being a free place to live. And third, much like the idea

According to this Fama & French three factors model, there are two more variable added into the regression model. They are SML factor (the return of small cap companies minus the the return of large cap companies) and HML factor (the

A lot of criticism on the CAPM has arisen over the last decades. One finding by Basu in 1977 is often used by opponents of the model in order to take down the foundation of the CAPM. Basu[3] found that stocks with a low price –earnings ratio, called value stocks, tend to outperform stocks with a high price-earnings ratio, named growth stocks. As the CAPM only allows for fundamental risk to explain excess returns on stocks, the finding that stocks from companies with high fundamentals (earnings, sales, dividends) relative to price outperformed growth stocks was in contradiction with the classical CAPM.

c. What do you think the Beta (ß) of your portfolio would be if you owned half of all the stocks traded on the major exchanges? Explain.

So in different types of situation we will get different types of return depending on which type of investment it is and what the economic situation is at the time (www.xpresstrade.com).

Retail is the sale of goods and services from individuals or businesses to the end user. Retailers are part of an integrated system called the supply chain. A retailer purchases goods or products in large quantities from manufacturers or directly through a wholesaler, and then sells smaller quantities to the consumer for a profit.

Asset pricing takes a vital role in the literature of finance. It forms a cornerstone for participants trying to manifest intrinsic/predicted values/prices for assets. Since 1965, when Sharpe introduced his CAPM formula, the field of asset pricing had shifted to a new paradigm. The model of Sharpe suggested that market beta as a variable is sufficient to explain stock returns. Sharpe’s work was preceded by Markowitz (1959) portfolio theory, where the lack of computer power at that time makes the calculations of huge set of covariance between stocks an inflexible approach. From this perspective, accompanied with simple and strong theoretical grounds, the CAPM gained high credit.

Firm has a range of projects to be invested in or finance in to increase the value of the company. However, to increase the value of the company, firm need to choose the worth pursuing project. In this case, firm need to evaluate the projects which the evaluation of a project can be done by cash flow method.

Beta – This ratio describes how much market risk is in your portfolio. A Beta of 1.0 means your portfolio has just as much risk as the S&P 500 and its performance will likely reflect that of the market.

Capital asset pricing has always been an active area in the finance literature. Capital Asset Pricing Model (CAPM) is one of the economic models used to determine the market price for risk and the appropriate measure of risk for a single asset. The CAPM shows that the equilibrium rates of return on all risky assets are function of their covariance with the market portfolio. This theory helps us understand why expected returns change through time. Furthermore, this model is developed in a hypothetical world with many assumptions.

Empirical studies show that these factors have exhibited excess returns above the market. For instance, the seminal Fama and French (1992) study found that the average small cap portfolio (averaged across all sorted book-to-market portfolios) earned monthly returns of 1.47% in contrast to the average large cap portfolio’s returns of 0.90% from July 1962 to December 1990.

The Efficient Markets theory has been a source of much controversy within both the academic and financial worlds. Eugene Fama first defined an “efficient” market as “a market where, given the available information, actual prices…represent very good estimates of intrinsic values” (1965, p.90). After Harry Roberts (1967) formed the “Efficient Market Hypothesis(EMH)”, Fama then went on to publish results that concluded the stock markets are efficient. Thus it is impossible to achieve consistent abnormal returns. However, investors daily are seeking to defy the EMH and therefore the hypothesis is under constant audit 252 days a year.

Still, CAPM remains to be used, or is adjusted to in order to fix anomalies; and to study empirical behaviour in the market. In adjusting the CAPM for anomalies, additional factors such as earnings yield (Basu, 1977), firm size (Banz, 1981), the firm’s ratio of book value of equity to its market value (Chan et al, 1991), leverage (Bhandari, 1988), stock liquidity (Amihud and Mendelson, 1986), and stock price momentum (Jegadeesh and Titman, 1993) are being used in describing the distribution of asset returns (Dempsey, 2013). Among these asset pricing models is the FFM.