Essay about Real Estate Volatility Tests

Here we choose VW NYSE, AMEX, and NASDAQ data as market returns, because it’s value weighted and more reliable. The results show CSC’s equity beta = 2.27, QRG’s equity beta = 1.79.

CAPM is Capital Asset Pricing Model. The CAPM formula shows a linear relationship between the expected return and systematic risk (Brealey, Myers and Allen, 2011). The formula is:

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

‘The Capital asset pricing model (CAPM) is a very useful model and it is used widely in the industry even though it is based on very strong assumptions. Discuss in the light of recent developments in the area.’

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

Moreover, once SMB and HML are defined, the corresponding coefficients bs and bv are determined by linear regressions and can take negative values as well as positive values. The signs of the coefficients suggested that small cap and value portfolios have higher expected returns and arguably higher expected risk than those of large cap and growth portfolios.

To find the asset Beta (βa), we need to find the weighted average β of equity and the weighted average β of debt. We consider the β of debt to be 0, as debt has no relationship with market risk and it is evident from the balance sheet that Ameritrade had no interest bearing debt in 1997[1].

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.

A trade-off often shows the link connecting risk and return. Presented the opportunity amid (Garnger, 2010) "two alternatives

Clearly, Charger Products is better off using the standard deviation and coefficient of variation, rather than subjective approach, to assess investment risk. Beta and CAPM, however, provide a link between risk and quantify risk and convert it into a required return that can be compared to the expected return to draw a de conclusion about investment acceptability. Contrasting the conclusions in the responses to parts c and d a clearly demonstrate why Mary is better off using beta to assess risk. Also, since Mary holds a diversified p systematic risk is the relevant risk for her to be concerned about. Since firm specific risk can be diversified portfolio, focusing on total risk (or standard deviation) may lead to distorted investment decisions.

stocks with a low price –earnings ratio, called value stocks, tend to outperform stocks with a high priceearnings

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.

JENSEN, M. C., BLACK, F. & SCHOLES, M. S. 1972. The capital asset pricing model: Some empirical tests.

A lot of criticism on the CAPM has arisen over the last decades. One finding by Basu in 1977 is often used by opponents of the model in order to take down the foundation of the CAPM. Basu[3] found that stocks with a low price –earnings ratio, called value stocks, tend to outperform stocks with a high price-earnings ratio, named growth stocks. As the CAPM only allows for fundamental risk to explain excess returns on stocks, the finding that stocks from companies with high fundamentals (earnings, sales, dividends) relative to price outperformed growth stocks was in contradiction with the classical CAPM.

CAPM model (Ang, A., & Chen, J. (2007). CAPM over the long run: 1926–2001. Journal of Empirical Finance, 14(1), 1-40.) is: