Capital Asset Pricing Model ( Capm ) And How It Can Be Used By Fund

It started in the 1920s when the United States stock market went through rapid expansion

billion. This was the start of the biggest national crisis since the civil war. The stock market was going

and the people stopped their spending and investments and to led many factories and other businesses to slow down production and begin sending the workers home and many lost their jobs. Some workers were lucky enough to keep their jobs but the wages fell and buying power decreased.

U.S. stock market crashed. This event is commonly referred to as the beginning of the

The CAPM is a single factor model because it based on the hypothesis that required rate of return can be predicted using one factor that being systematic risk. It looks at risk and rates of returns, compares then to the stock market providing a usable measure of risk to help investors determine what return they will get for risking their money in an investment. There are a lot of assumptions and drawbacks of CAPM that lead to the conclusion that those investors utilizing this

The goal of this paper is to explain why CCM’s aggressive program is a good alternative to any investor looking to diversify its portfolio. The paper will be divided into three distinct parts: the operational analysis, the quantitative analysis and a comparison against its peers (including the impact of CCM in a traditional portfolio).

The Capital Assets Price Model (CAPM), is a model for pricing an individual security or a portfolio. Its basic function is to describe the relationship between risk and expected return, which is often used to estimate a cost of equity (Wikipedia, 2009). It serves as a model for determining the discount rate which is used in calculating net present value. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. The formula is:

In 2008 the world experienced one of the largest economic crisis, next to the great depression of the 1930’s. The meltdown revealed the instability of the US banking system and led to the bankruptcy of investment firm Leimen brothers, and collapse of worlds largest insurance company AIG, which triggered a global financial crisis. International share prices tumbled, causing 30 million people to become unemployed and doubling the US debt. It was the start of a global recession and it was not an accident.

when the New York Stock Exchange collapsed that is when millions of shares were sold because many people lost hope of the economy, and over $50 billion

Real gross domestic product (GDP) fell 4.3 percent from its peak. The unemployment rate, which was 5 percent and peaked at 10 percent in October 2009.’ (Robert Rich, 2013). The effects of recession became outsized, including large falling of home prices, the S&P 500 index and the falling net worth of US households and nonprofit organizations.

CAPM results can be compared to the best expected rate of return that investor can possibly earn in other investments with similar risks, which is the cost of capital. Under the CAPM, the market portfolio is a well-diversified, efficient portfolio representing the non-diversifiable risk in the economy. Therefore, investments have similar risk if they have the same sensitivity to market risk, as measured by their beta with the market portfolio.

Investors hold diversified portfolios : One of the assumptions of CAPM model is that investors are holding only portfolios which are subjected to systematic risk , the unsystematic risk can be ignored , therefore the unsystematic risk has been ignored (Lakonishok & Shapiro , 1986)

before the passage of securities regulation in the 1930s. Hawkins explained that the New York

In order to test the validity of the CAPM, we have applied the two-step testing procedure for asset pricing model as proposed by Fama and Macbeth (1973) in their seminal paper.

Even though there are flaws in the CAPM for empirical study, the approach of the linearity of expected return and risk is readily relevant. As Fama & French (2004:20) stated “… Markowitz’s portfolio model … is nevertheless a theoretical tour de force.” It could be seen that the study of this paper may possibly justify Fama & French’s study that stated the CAPM is insufficient in interpreting the expected return with respect to risk. This is due to the failure of considering the other market factors that would affect the stock price.