1292 Words6 Pages

Introduction

Graham and Harvey (2001) surveyed the CFOs of 392 U.S. firms and found that when estimating the capital of assets,73.5% of respondents use CAPM. It is a model which use simple formula to evaluate asset pricing and investor behavior. This model is absolutely the method with most investors used but many financial experts raise an objection to the veracity of this method in the recent years. Later in the main body of essay will discuss these question; In the first part of the essay will introduce the CAPM and the main factor of this method. Secondly is the discussion of the uses and limitation of the CAPM while evaluating the potential investment of a firm 's share. After that is the adverse and favorable way of CAPM as a resource of discount rate. The last paragraph is the conclusion that rating the merits and demerits of the CAPM in the investment.

Main body

Capital asset pricing model (CAPM) first provide the coherent framework for answering the relationship of expected return and the risk of investments and how equilibrium price come out.(Perold, A. F. ,2004) The initial goal of CAPM is to assess the risky assets such as stock. And the stock value is mostly according to the degree of risk that the held shares might get the return. These properties are similar to venture capital and both of them discounted future earnings in accordance with risk premium. So that, CAPM can used to determine the discount rate of the venture investment project at the same time.

Graham and Harvey (2001) surveyed the CFOs of 392 U.S. firms and found that when estimating the capital of assets,73.5% of respondents use CAPM. It is a model which use simple formula to evaluate asset pricing and investor behavior. This model is absolutely the method with most investors used but many financial experts raise an objection to the veracity of this method in the recent years. Later in the main body of essay will discuss these question; In the first part of the essay will introduce the CAPM and the main factor of this method. Secondly is the discussion of the uses and limitation of the CAPM while evaluating the potential investment of a firm 's share. After that is the adverse and favorable way of CAPM as a resource of discount rate. The last paragraph is the conclusion that rating the merits and demerits of the CAPM in the investment.

Main body

Capital asset pricing model (CAPM) first provide the coherent framework for answering the relationship of expected return and the risk of investments and how equilibrium price come out.(Perold, A. F. ,2004) The initial goal of CAPM is to assess the risky assets such as stock. And the stock value is mostly according to the degree of risk that the held shares might get the return. These properties are similar to venture capital and both of them discounted future earnings in accordance with risk premium. So that, CAPM can used to determine the discount rate of the venture investment project at the same time.

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