(e) Briefly discuss the implications of the Capital Asset Pricing Model for the relationship between the...

(e) Briefly discuss the implications of the Capital Asset Pricing Model for the relationship between the current spot price of an asset and the discount offered by the seller of a futures contract.

Expert Solution

ANS:

CAPM (Capital asset pricing model) describes the relationship between systematic risk & expected return for assets.

Cost of equity (Ke) is calculated by CAPM = Risk free rate (Rf) + Beta (Market return - Risk free rate)

Ke calculated via CAPM has relationship Spot price which is established with the help of following formula -

Spot price (Po) = Do * (1+g) / Ke -g

Therefore, there is an inverse relationship between Price & Ke. Spot price are the immediate buying & selling price, i.e Spot price is the current price at which stock, commodity or currency can be bought or sold. On the other hand, when spot price exceeds the future price, it is referred as discount, it means there is favourable situation for investors to invest & earn a good return. Basically Premium & Discount in stock market depends upon the following points -

Economic Strenght of Industry
Liquidity in stock market
Marketing Trends
Inflation / Deflation in market etc.

jeff jeffy answered 2 years ago

Question 3 Briefly discuss the implications of the Capital Asset Pricing Model for the relationship between...

Question 3 Briefly discuss the implications of the Capital Asset Pricing Model for the relationship between the current spot price of an asset and the discount offered by the seller of a futures contract. (100 words)

Capital Asset Pricing Model

If the risk-free rate in the market is 4% and the expected return from the market is 10%. What will be the expected return from your stock if it has a beta of 1.2?

CAPITAL ASSET PRICING MODEL - (A) Use Capital Asset Pricing Model (CAPM) to calculate the expected...

CAPITAL ASSET PRICING MODEL - (A) Use Capital Asset Pricing Model (CAPM) to calculate the expected return on a stock that has a beta of 2.5 if the risk-free rate is 3 percent and the market portfolio is expected to pay 11 percent? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM FOR EXCEL). BETA - (B) Company X was a steel company for the first hundred years of its existence but it has been a health care company for the past...

Compare and contrast the international capital asset pricing model to the domestic capital asset pricing model....

Compare and contrast the international capital asset pricing model to the domestic capital asset pricing model. Your response should be at least 200 words in length.

2) Discuss the shortcomings of the capital asset pricing model. How does the arbitrage pricing model...

2) Discuss the shortcomings of the capital asset pricing model. How does the arbitrage pricing model address these shortcomings? Discuss the major shortcoming of the arbitrage pricing model? Explain which model is more useful in your opinion.

1. What is the relationship that constitutes the foundation of the Capital Asset Pricing Model? 2....

1. What is the relationship that constitutes the foundation of the Capital Asset Pricing Model? 2. What are the vital functions that this relationship serves? 3. List two (2) of the assumptions that lead to the basic version of the CAPM 4. Explain what the “Market Portfolio” is. 5. Explain what the Security Market Line is.

Briefly describe the Capital Asset Pricing Model and its use in investment opportunities.

Beiefly explain, discuss and comment on CAPM (Capital Asset Pricing Model)

The capital asset pricing model (CAPM) can be written as E(Ri) = Rf+ βi[E(Rm) − Rf]...

The capital asset pricing model (CAPM) can be written as E(Ri) = Rf+ βi[E(Rm) − Rf] using the standard notation. The first step in using the CAPM is to estimate the stock’s beta using the market model. The market model can be written as Rit= αi+ βiRmt+ uit where Rit is the excess return for security i at time t, Rmtis the excess return on a proxy for the market portfolio at time t, and utis an iid random disturbance...

Explain the Capital Asset Pricing Model (CAPM).

Question