“The Security Market Line is flatter than the ‘Capital Asset Pricing Model’ (CAPM) would predict.” Describe the theory and empirical evidence related to this statement.
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“The Security Market Line is flatter than the ‘
The security market line (SML) is a pictorial depiction of the capital asset pricing model (CAPM), which plots various degrees of systematic, or market risk, of various capital assets against the projected return of the entire market at any one time.
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- What is a Dividend Discount model? What is the main advantage of this model over the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) approaches? ExplainAlthough its application continues to spark vigorous debate, modern financial theory is now applied as a matter of course to investment management. CAPM, the capital asset pricing model, is a theoretical representation of the behavior of financial markets and can be employed in estimating a company’s cost of equity capital. Despite limitations, the model can be a useful addition to the financial manager’s analytical tool kit. The expanding work on the theory and application of CAPM has produced many sophisticated, often highly complex extensions of the simple model. Discuss the assumptions that the modern financial theory and CAPM rest on. Discuss whether assumptions that they depend on are realistic or unrealistic. Discuss how the concept of risk is defined or calculated in financial theory and CAPM.Discuss how the concepts of pure security,short selling and no arbitrage profit help establish and understand the equilibrium in capital market. Discuss different economic determinants security prices.
- According to the efficient markets hypothesis,a. changes in stock prices are impossible to predict from publicinformation.b. excessive diversification can reduce an investor's expected portfolioreturns.c. the stock market moves based on the changing animal spirits ofinvestors.d. actively managed mutual funds should give higher returns than indexfunds.Under the assumptions of the Black-Scholes model, which value does not affect the price of a European call option a. interest rate R b. strike price K c. spot price S d. return of the stock U e. volatility of the stock OResearch shows that some publicly available information such as dividend yields can be used to predict future security returns. Explain the three forms of the efficient market hypothesis and discuss whether this fact violates any form of the efficient market
- Contrast the risk tolerance and Liquidity needs for Banks and Individual investorsWhat is the best explanation of liquidity premium? What is suggested by an upward sloping yield according to segmented market theory? ExplainWhich of the following is a true statement? a. In a bubble, the price of the asset is the expected present value of its future returns. b. The overall real value of the stock market may fluctuate significantly over a year. c. The higher the one-year interest rate, the higher the present discounted value of a payment next year. d. The yield curve normally slopes down.
- traditional yield management strategies are most appropriate when? A. The service providers has a homogeneous target market B. Its target market is not price sensitive C. All members of the target market arrive at basically the same time D. Those who arrive early or reserve early are more price sensitive than those who reserve or arrive late E. All of the target market is equally price sensitiveOrb Trust (Orb) has historically leaned towards a passive management style of its portfolios. The only model that Orb’s senior management has promoted in the past is the Capital Asset Pricing Model (CAPM). Now Orb’s management has asked one of its analysts, Kevin McCracken, CFA, toinvestigate the use of the Arbitrage Pricing Theory model (APT).McCracken has determined that a two-factor APT model is adequate where the factors are the sensitivity to changes in real GDP and changes in inflation. McCracken’s analysis has led him to the conclusion that the factor risk premium for real GDP is 8 percent while the factor risk premium for inflation is 2 percent. He estimates for Orb’s High Growth Fund that the sensitivities to these two factors are 1.25 and 1.5 respectively. Using his APT results, he computes the expected return of the fund. For comparison purposes, he then uses fundamental analysis to also computethe expected return of Orb’s High Growth Fund. McCracken finds that the two…The bond rating agencies(choose right answer) a:used outdated computer modeling software and miscalculated the risks. b:provided helpful recommendations, but these were ignored by the banking industry c:were helpful in reducing the extent of the crisis because of their correct risk assessment d:were raking it in when they also acted as consultants to the investment firms. I will rate accordingly. Typed and correct answer please.