6429 WordsFeb 11, 201326 Pages

Yurop Shrestha
Economics Thesis
CAPM vs. APT: An Empirical Analysis
Introduction
The Capital Asset Pricing Model (CAPM), was first developed by William Sharpe (1964), and later extended and clarified by John Lintner (1965) and Fischer Black (1972). Four decades after the birth of this model, CAPM is still accepted as an appropriate technique for evaluating financial assets and retains an important place in both academic scholars and finance practitioners. It is used to estimate cost of capital for firms, evaluating the performance of managed portfolios and also to determine asset prices. Since the inception of this model there have been numerous researches and empirical testing to assess the strength and the validity of the model.*…show more content…*

The three most commonly used techniques are the “market model” (This is the most common one. I will be using this for my testing), Scholes-Williams, and Dimson estimators. There are numerous advantages/benefits as well as some flaws in all the beta estimating techniques. Examining that fall outside the field of this paper but the limitation section looks at the problems of the different techniques very briefly. In order to compare the two models, staying consistent with the estimation techniques will be sufficient regardless of their flaws or biases.
ARBITRAGE PRICING THEORY The APT is the alternative model for asset pricing first developed by Ross (1976). This is a very appropriate model as it agrees perfectly with what appears to be the intuition behind the CAPM. It is based on a linear return generating process as a first principle. Also it is more sophisticated that the CAPM because it takes into account more systematic factors that might be relevant. It examines other macroeconomic variables besides the market risk, making this model more sophisticated. It captures other factors that might have been ignored by the CAPM. Formally the APT can be stated as follows. rj=Erj+bj1F1+ bj2F2+…+bjnFn+ϵj (3)
Where,
E(rj) is the jth asset’s expected return,
Fk is a systematic factor (assumed to have mean zero), bjk is the sensitivity of the jth asset to factor k, also called factor loading, and εj is the

Related

## 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

## Discounted Cash Flow Analysis - Empirical Study

12804 Words | 52 PagesAn empirical study of the discounted cash flow model Martin Edsinger1, Christian Stenberg2 June 2008 Master’s thesis in Accounting and Financial Management Stockholm School of Economics Abstract The purpose of this thesis is to compare the practical use of the DCF model with the theoretical recommendations. The empirical study is based on eight different DCF models performed by American, European and Nordic investment banks on the Swedish retail company Hennes & Mauritz (H&M). These models

## Final Exam Cheat Sheet

6867 Words | 28 Pagescapital asset pricing model (CAPM) was developed by W. Sharpe & is based on Markowitz’s portfolio theory (efficient set: theory in which he derives an optimal set of portfolios that have the highest expected return for a given level of risk), the implementation of which is tedious since co-movement between any two securities must be considered. [if there are n=5 securities, we need to consider n(n-1)/2 {= 10) co-movements]. CAPM simplifies Markowitz’s analysis by assuming a perfect market (a

## Investment Bodie Kane Notes

30163 Words | 121 Pagesbecause they allow for separation of the ownership and management of the firm and facilitate the transfer of funds to enterprise with attractive investment opportunities. Financial assets are claims to the income generated by real assets. 3. Real vs. Financial assets: a. Real assets produce goods and services, whereas financial assets define the allocation of income or wealth among investors. b. They are distinguished operationally by the balance sheets of individuals and firms in the economy

## THEORY SUMMARY

15082 Words | 61 Pagesperpetuity), then the model can be simplified into the form that explained the relationship between expected return, dividend flow and market price Note that rs is the required rate of return = risk free rate + risk premium rs can be estimated using the CAPM model Since future cash flows are constant, the value of a zero growth stock is the present value of a perpetuity Preferred stocks are an example of no-growth stocks Constant growth dividend model An alternative simplifying assumption about the future

## Summary: Commercial Real Estate Analysis and Investment

18579 Words | 75 PagesMarket Analysis. Objective: The goal of market analysis is to characterize (both qualitative and quantitative) the supply and demand of a specific space market. 6.1 General Features. Practical market analysis needs to be simple and based upon realistic data so that it can be used quickly and inexpensively. Also, this way it can be easily communicated and understood in business. Thus, most analysis stems from direct and common sense procedures. There are different kinds of analysis; whereas

## Summary: Commercial Real Estate Analysis and Investment

18572 Words | 75 PagesEstate Market Analysis. Objective: The goal of market analysis is to characterize (both qualitative and quantitative) the supply and demand of a specific space market. 6.1 General Features. Practical market analysis needs to be simple and based upon realistic data so that it can be used quickly and inexpensively. Also, this way it can be easily communicated and understood in business. Thus, most analysis stems from direct and common sense procedures. There are different kinds of analysis; whereas

## Selected Topics

24764 Words | 100 PagesMethodology: There is a need to employ more sophisticated techniques to the data in order to reap the full benefits of this research. This Analysis section hopes to test the hypothetic relationships between variables delivered via the two models. Statistical Inferencing techniques are well suited to this type of cross sectional data. A multivariate analysis involves analysing the effect of a number of variables on a single variable. Many of the variables may be correlated i.e. may affect each other

## Bodie, Kane, Marcus Study Guide Essay

40928 Words | 164 Pagesstock and changes in the value of small firm and large firm stocks affect the index value identically. While this method is not as commonly used in many published indices, it is commonly used in research and is important in describing results of empirical examinations on market efficiency discussed in later chapters. Also if an investor actually does put equal dollar amounts into various stocks then an equal weighted index is probably the better benchmark. The PPT slides contain sample calculations

## Mba Solved Assignment Papers

52670 Words | 211 Pagespreviously discussed, the boundaries between them may be fuzzy): Exploratory research, which structures and identifies new problems Constructive research, which develops solutions to a problem .Empirical research, which tests the feasibility of a solution using empirical evidence The research room at the New York Public Library, an example of secondary research in progress. Research can also fall into two distinct types: Primary research Secondary research In social sciences

### Capital Asset Pricing Model and Arbitrage Pricing Theory

3608 Words | 14 Pages### Discounted Cash Flow Analysis - Empirical Study

12804 Words | 52 Pages### Final Exam Cheat Sheet

6867 Words | 28 Pages### Investment Bodie Kane Notes

30163 Words | 121 Pages### THEORY SUMMARY

15082 Words | 61 Pages### Summary: Commercial Real Estate Analysis and Investment

18579 Words | 75 Pages### Summary: Commercial Real Estate Analysis and Investment

18572 Words | 75 Pages### Selected Topics

24764 Words | 100 Pages### Bodie, Kane, Marcus Study Guide Essay

40928 Words | 164 Pages### Mba Solved Assignment Papers

52670 Words | 211 Pages

- Nutrition: Concepts and Controversies - Standalone book (MindTap Course List)
- Applied Calculus
- Finite Mathematics and Applied Calculus (MindTap Course List)
- Finite Mathematics and Applied Calculus (MindTap Course List)
- Probability and Statistics for Engineering and the Sciences
- Calculus: An Applied Approach (MindTap Course List)