Capital Asset Pricing Model (Capm)
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.
The SharpLintnerBlack CAPM states that the expected return of any capital asset is proportional to its systematic risk measured by the beta. (Iqbal and Brooks, 2007). Based on some simplifying …show more content…
In the CAPM, betas are generally estimated from the stock’s characteristic line by running a linear regression between past returns on the stock in question and past returns on some market index. Bringham and Ehrhardt (2005) define betas developed in this manner as historical betas. However, Fama and French (1992) argue about the reliability of beta in explaining the differences in expected returns. According to their studies, they have found empirical evidence that firm size, booktomarket, and earningstoprice have significant explanatory power for average returns, calling into question the descriptive validity of the CAPM of Sharpe (1964), Lintner (1965), and Black (1972). The validity of the CAPM is questioned because of the CAPM posits a positive linear relation between ex ante expected returns and betas, while other firm specific variables such as firm size, booktomarket, and earningstoprice should not have any ability to explain average crosssectional returns. The empirical evidence of Fama and French thus contradicts the CAPM.
The Fama and French study

Capital Asset Pricing Model and Arbitrage Pricing Theory
3608 Words  14 PagesCapital Asset Pricing Model and Arbitrage Pricing Theory: Capital Asset Pricing Model (CAPM) is an arithmetical theory that describes the relationship between risk and return in a balanced market. The Capital Assets Pricing Model was autonomously and simultaneously developed by William Sharpe, Jan Mossin, and John Litner. The researches of these founders were published in three different and highly respected journal articles between 1964 and 1966. Since its inception, the model has been used in…

The Capital Asset Pricing Model (CAPM)
536 Words  2 Pages5.2.4.6.1. The Capital Asset Pricing Model (CAPM) Financial theory accepts the belief that a share’s return should be proportional to the risk received by its holder. There is a need of a riskreturn equilibrium model. Since the nativity of the efficient market hypothesis (EMH), an equilibrium model was only the Capital Asset Pricing Model (CAPM). The CAPM constitutes of two types of returns, the risk free rate of returns of the Treasury bills and beta times the return on the market portfolio. The…

Capital Asset Pricing Model (Capm)vs.Arbitrage Pricing Theory (Apt).
887 Words  4 PagesCAPM vs. APT Asset Pricing Model are very useful tools that enable financial annalists or just simply independent investors evaluate the risk in an specific investment and at the same time set a specific rate of return with respect the amount of risk of an individual investment or a portfolio. The CAPM method while simpler than the ATP method takes into consideration the factor of time and does not get too wrapped up over the Systematic risk factors that sometimes we can not control. In this paper…

Capital Asset Pricing Model of Starbucks
455 Words  2 PagesThe inclusion of Starbucks therefore will increase the risk of the portfolio, because the beta for Starbucks is higher than 1.0. The reason is that Starbucks stock has historically been more volatile than the broader market. b. The capital asset pricing model is as follows: INCLUDEPICTURE "http://i.investopedia.com/inv/dictionary/terms/CAPM.gif" * MERGEFORMATINET Source: Investopedia (2012) Therefore the cost of equity for Starbucks is as follows: Ra = 4.5 + 1.28(6.5) Ra = 12.82%…

Capital Asset Pricing Model (Capm) Versus the Discounted Cash Flows Method
1204 Words  5 PagesCapital Asset Pricing Model (CAPM) Versus the Discounted Cash Flows Method Managerial Analysis/BUSN 602 Capital asset pricing model or CAPM is a financial model that measures the risk premium inherent in equity investments like common stocks while Discounted Cash Flow or DCF compares the cost of an investment with the present value of future cash flows generated by the investment with the mindset being that if the cash flow is positive, then the investment is good. Generally speaking, CAPM is a…

Essay on The Capital Asset Pricing Model (CAPM)
1863 Words  8 PagesThe Capital Asset Pricing Model (CAPM) Introduction In almost every economics textbook (Ben and Robert, 2001), economists tend to argue: everything’s market price is determined by consumers’ demand and supply in the market, the intersection of which gives us the longterm concept of ‘market equilibrium’. Although it sounds straightforward, it is anything but easy in practice, especially when the assets (like common stock) you are measuring associated with risk and future uncertainties…

Capital Asset Pricing Model (Capm)
2539 Words  11 PagesIntroduction 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…

Portfolio Theory and the Capital Asset Pricing Model (Capm) Are Essential Tools for Portfolio Managers and Other Stock Market Investors’
2673 Words  11 Pages‘Portfolio theory and the capital asset pricing model (CAPM) are essential tools for portfolio managers and other stock market investors’ In order to be successful, an investor must understand and be comfortable with taking risks. Creating wealth is the object of making investments, and risk is the energy that in the long run drives investment returns. PORTFOLIO THEORY Modern portfolio theory has one, and really only one, central theme: “In constructing their portfolios investors need to look at…

The Theory of Capital Asset Pricing Model
2580 Words  10 PagesHead: Capital Asset Pricing Model Capital Asset Pricing Model Introduction This research paper tends to describe the theory of Capital Asset Pricing Model, which is a theoretical invention much useful for businesspersons and investors who invest with the prevailing risk in the economical environment. The key points of the theory are extracted and highlighted with respect to the explanation of William Sharpe's "A theory of Market Equilibrium under conditions of risk". Capital asset pricing model…

Essay on Capital Asset Pricing Model
913 Words  4 Pagesagainst one large publicly traded corporation. 2. Use the CAPM to answer the following questions: a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 12%, the RiskFree Rate is 4%, and the Beta (b) for Asset "i" is 1.2. b. Find the RiskFree Rate given that the Expected Rate of Return on Asset "j" is 9%, the Expected Return on the Market Portfolio is 10%, and the Beta (b) for Asset "j" is 0.8. c. What do you think the Beta (β) of your…
More about Capital Asset Pricing Model (Capm)

Capital Asset Pricing Model and Arbitrage Pricing Theory
3608 Words  14 Pages 
The Capital Asset Pricing Model (CAPM)
536 Words  2 Pages 
Capital Asset Pricing Model (Capm)vs.Arbitrage Pricing Theory (Apt).
887 Words  4 Pages 
Capital Asset Pricing Model of Starbucks
455 Words  2 Pages 
Capital Asset Pricing Model (Capm) Versus the Discounted Cash Flows Method
1204 Words  5 Pages 
Essay on The Capital Asset Pricing Model (CAPM)
1863 Words  8 Pages 
Capital Asset Pricing Model (Capm)
2539 Words  11 Pages 
Portfolio Theory and the Capital Asset Pricing Model (Capm) Are Essential Tools for Portfolio Managers and Other Stock Market Investors’
2673 Words  11 Pages 
The Theory of Capital Asset Pricing Model
2580 Words  10 Pages 
Essay on Capital Asset Pricing Model
913 Words  4 Pages