The Valuation Of Mutual Fund

‘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.’

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.

This report aims at implement two distinct approaches, which can indicate the expected return and risk of a two-stock portfolio, to generate a practical solution to risk-analyzing for stock-investing. The two approaches are Mean-Variance Approach and CAPM Approach. While we apply the Mean-Variance Approach to determine the expected return and standard deviation, we employ the CAPM approach to measure the beta and expected return of each stock. The calculations of the aforesaid mathematical characteristics will contain the weekly returns during a seven-year time period integrated with the ASX all ordinaries Accumulation Index as a substitute for the market index and Official Cash Rate (thereafter, OCR, which is the interest

This provided support for the CAPM and the approach for beta as the only predictor for differences in expected return (Haugen, 1999, p.238-239).

The analysis of this paper will derive the validity of the Fama and French (FF) model and the efficiency of the Capital Asset Pricing Model (CAPM). The comparison of the Fama and French Model and CAPM (Sharpe, 1964 & Lintner, 1965) uses real time data of stock market to practise its efficacy. The implication of the function in realistic conditions would justify the utility of the CAPM theory. The theory suggests that the expected return demanded by investors on a risky asset depends on the risk-free rate of interest, the expected return on the market portfolio, the variance of the return on the market portfolio, and

Every investment company appoints a fund manager who invests the money in different investment opportunities. These could run from shares to debentures to currency market instruments, contingent on the plan's expressed targets. The income earned through these investments and the capital appreciation acknowledged by the plan is shared by its unit holders in extent to the quantity of units claimed by them. Therefore a Mutual Fund is the most appropriate investment for the investor as it offers a chance to put resources into an enhanced, professionally managed basket of securities at a moderately low cost. Mutual fund schemes are offered on the basis of structure and investment objectives.

CAPM is a highly acclaimed theory of risk and return for securities in a competitive capital market. The path breaking theory won Sharpe, Markowitz, and Miller the Nobel Memorial Prize in Economics in 1990. CAPM establishes the Beta coefficient as a measure of the systematic risk of an asset. The systematic risk is also known as market risk. This risk cannot be eliminated. This systematic risk is uncontrollable. The unsystematic risks include the risk that influences a single company or a small group of company and the same is controllable and can be mitigated through diversification.

This paper aims to analyze the validity of the CAPM model of predicting returns for stocks by empirically testing the model with past financial data. The CAPM model is defined as R_i=r_f+ β_i (R_m-r_f). R_i represents the return on stock i, and is what the CAPM model attempts to define or predict. r_f represents the risk free rate available at the time the model is being analyzed, a figure that’s important for understanding both minimum return figures and the return premium offered by the market. β_i represents the Beta of stock i and is a measure of a given company’s volatility relative to the market they are in. If β_i is one, then the company is at market risk, if it is lower than one then it is below market risk, and if it is higher than one then it is above market risk. The only stock that would have a Beta of 0 would be a risk free stock, or whatever security you are using for your risk free rate. β_i is calculated as (COVARIANCE(r_i-r_f,〖 r〗_m-r_f))/(VARIANCE(〖 r〗_m-r_f)).(R_m-r_f) represents the Market Risk Premium, or the level of return an average stock in the market would return in excess of the risk free rate.

A mutual fund is an open-end speculation organization that puts cash of its shareholders in a typically expanded gathering of securities of different companies, as characterized in the Merriam-Webster word reference. Common assets help with financing and contributing open doors. They allow the little financial specialists to put their cash in different ranges other than stocks and bonds. There is numerous common assets to browse and distinctive reasons why shareholders ought to pick them. As mainstream as common assets have ended up, there is ruins to them like most speculation opportunities. In 2003, mutual funds were giving an awful name when an outrage was brought open.

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.

This paper examines the Capital Asset Pricing Model(CAPM) and the Fama-French three-factor model(FF) and the Fama-MacBeth model(FM) for the 201211 CRSP database using monthly returns from 25 portfolios for 2 periods ---July 1931 to June 2012 and July 1631 to June 2012. The theory’s prediction is that the intercept should equal to zero the slope should be the excess return on the market portfolio. The findings of this study are not substantiating the theory’s claim for the fact that in some portfolios the alpha is

Capital asset pricing model (CAPM) first provide the coherent framework for answering the relationship of expected return and the risk of investments and how equilibrium price come out.(Perold, A. F. ,2004) The initial goal of CAPM is to assess the risky assets such as stock. And the stock value is mostly according to the degree of risk that the held shares might get the return. These properties are similar to venture capital and both of them discounted future earnings in accordance with risk premium. So that, CAPM can used to determine the discount rate of the venture investment project at the same time.

The capital asset pricing model, also called CAPM, is created by William Sharpe, John Lintner, Jack Treynor and Jan Mossin in 1964, aiming to study the decision process of security price in the market. With proper assumptions on investors’ behavior, the capital asset pricing model pays the most attention to the exploration of quantified relationship between security return and the risk. However, academic community is turning away from the classical model and tries to analyze the relationship with other tools. This essay will mainly discuss the reasons why academic community is avoiding the CAPM. In addition, the relationship between risk and return will firstly be explained. More details on fundamental features of the CAPM will be given out. Empirical evidence will be adopted to illustrate the CAPM.

The natures of investment return (future values) are generally uncertain apart from fixed interest securities. Due to this uncertainty, investors have had trouble in trying to predict the unstable nature of investments, especially lately with the Global Financial Crisis (GFC). One way of seeing how an investment will likely do is to undergo a historical analysis. The investment options are Australian: Shares, property and managed funds. These options are considered three of the most popular investment options. To get a more accurate representation of its past happenings, it is better to look at benchmarking indices rather than individual companies. Unfortunately due to the discontinuance of the index for managed funds index

In the following essay I will be comparing and contrasting the effectives of the capital asset pricing model (CAPM), Arbitrage Pricing Theory, and the Fama-French three factor model when estimating the cost of capital and explaining performance of investment portfolios.