Question

Do interest rates and risk affect a stock’s price in the Capital Asset Pricing Model (CAPM)? Why?

The efficient market hypothesis (EMH) suggests that it is difficult to outperform the market on a consistent basis. Are there possible exceptions to the hypothesis that concern the valuation of common stock? [Discussion Questions: Reference Chapter 9]

Answer 1

Interest rate and risk will be affecting the price of the stock in the Capital Asset pricing model because risk is represented in the beta because beta is the overall systematic risk.

Interest rates increase is leading to increase in the risk in the macroeconomy factor and macroeconomic factors is a representation of systematic risk in the economy and it will mean that the overall bit of Beta will be increasing due to increase in the risk in the macroeconomic factors.

2. Efficient market hypothesis can never be outperformed and there has to be certain discrepancy in the price which will completely eliminate the effect of Efficient market hypothesis as this will be violation to the Efficient market hypothesis.

however there are certain exceptions to Efficient market hypothesis and they are-

these are exceptions which are known as January effect and small firm effect and these seems to offer the hope for the investor of insider trading.

These exceptions are through the use of the historical data and they may apply in present or not, However, many investors are always wanting to seek advantage out of it.