Essay about Introduction Finance

1. True or False: According to the CAPM, a stock's expected return is positively related to its beta.

The table below shows the equity betas for the firms presented in the case (using Jan-92 to Dec-96 equal weight NYSE/AMEX/NASDAQ as market portfolio):

Cost of Equity = Risk free rate + (Market return – risk free rate) X beta

4. The various weighted combinations of stocks that create this standard deviations constitute the set of efficient portfolios.

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.

d. The expected return and standard deviation will change as the portfolio mix changes.( see the assumption portfolio on the attachment).

(See all the possible combinations on TABLE 2). 6. a) The portfolio’s risk would decrease if more stocks were.

This essay will highlight the use of Capital asset pricing model ( CAPM ) to be considered as a pricing theory model for assets . CAPM model helps investors to analyse the risk and what expectation to keep from an investment (Banz , 1981) . There are two types of risk

(15 points) Suppose all investors are risk-averse and hold diversified portfolios. You are evaluating a new drug company that is going to have two divisions: an R&D unit and a Sales unit. Your CEO and you are arguing about whether the two units should have the same cost

Using time series regression on the monthly returns we have estimated the beta coefficient for each stock. Using the market model of CAPM i.e., regressing each stock’s monthly returns against the market index (Nifty100) we have estimated individual stock beta’s.

Using the same market risk premium and risk free rate (5.5% & 4.62% respectively) given in the case, the averaged beta of 1.40, the pretax cost of debt of 7.65%, and the weighted average of debt & equity, the products & systems

Using CAPM: Risk Free Rate = 6%; Market Risk Premium = 5%; Beta = 1.2

The Beta is the second consideration of the CAPM that ignites some debate. Forward looking Betas are unobservable so the debate is what kind of method to use in getting these Betas. There are a few compromises in obtaining the Beta. One of these is increasing the number of time periods you’re looking into for the historical date in which you run the risk of including stale data. Another problem is shortening the time periods increases your chances of factoring in unwanted random noise. The

Financial Management is a critical aspect of any business in order to achieve a sustainable and efficient cash flow. It is essential in maintaining the link between a business’s future financial goals (profit maximization) and the resources that it has in order to achieve its objectives. Businesses demand certain common goals that increase a bussiness's all around achievement, Some of which involve; growth amongst assests, An increase in efficiency in all areas of the business whether it be management or not. And the ability to meet short term and long term debts. Finacial management undertakes the responsibility to implement and acheive these goals for the business using a range of strategies shaped to meet the needs of the business and

According to early academic researches, CAPM seems to have some problems when examining assumptions and empirical testing. Researchers attempt to develop a new model by improving the weak points and make it more realistic which enable investors understand more about financial market situation. Bodie et al. (2014) state that multifactor model could provide better explanation of security returns. Merton (1973) develop ‘Intertemporal model’ to imply that by using beta as a risk measure alone might not yields efficient results in the real world. Therefore, he suggests that other factors could be involved in the calculation. It is clear that he suggests investors to consider not only market risk but also extra market source of risk. Moreover, he mentions that CAPM has a limitations on the economic way of thinking because there are two important factors which are income and many consumption of goods are not be considered. These two factors are changing over time and relative to price.