Question

In: Accounting

I want 2000 word please Case Study Analysis #1 How successful has been the CAPM in...

I want 2000 word please
Case Study Analysis #1
How successful has been the CAPM in explaining return on risky assets? What are the known issues? Is beta stable?

Solutions

Expert Solution

The capital asset pricing model is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for the pricing of risky securities, generating expected returns for assets given the risk of those assets and calculating costs of capital.

The general idea behind CAPM is that investors need two forms of compensation: time value of money and risk. The risk-free rate in the formula represents the time value of money and compensates the investors for placing money in any investment over time. The risk-free rate is customarily the yield on government bonds like U.S. Treasuries.

The other half of the CAPM formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. You can calculate this by taking a risk measure (beta) that compares the returns of the asset to the market over time and to the market premium (Rm-rf): the return of the market in excess of the risk-free rate. Beta reflects how risky an asset is compared to overall market risk and is a function of the volatility of the asset and the market, and the correlation between the two. For stocks, the S&P 500 usually represents the market, but more robust indexes can represent it too.

The CAPM model says the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).


Related Solutions

How successful has been the CAPM in explaining return on risky assets and What are the...
How successful has been the CAPM in explaining return on risky assets and What are the known issues Also Is beta stable?
please I want 600 word Study the comparative management in focus "communicating with Arabs" carefully and...
please I want 600 word Study the comparative management in focus "communicating with Arabs" carefully and critically. What behavior should be considered in both verbal and nonverbal negotiations in a cross-cultural business dealing with Arabs? Based on the first and second week of class discussions on the fundamentals of Strategic Planning, and the effect of culture on such planning, what is the process to formulate the strategic planning in the global environment?
Case Study: The Flower Shop Anastasia owns a successful flower shop. She has been in business...
Case Study: The Flower Shop Anastasia owns a successful flower shop. She has been in business for four years and enjoys a good reputation in the community. She is a good marketer and good manager. The shop is in a prominent location with an ample parking lot which thus provides good foot traffic for the business. The shop is opened six days a week from 10am to 5pm. Recently, she has been thinking about extending the flower shop's hours an...
Case Study: The Flower Shop Anastasia owns a successful flower shop. She has been in business...
Case Study: The Flower Shop Anastasia owns a successful flower shop. She has been in business for four years and enjoys a good reputation in the community. She is a good marketer and good manager. The shop is in a prominent location with an ample parking lot which thus provides good foot traffic for the business. The shop is opened six days a week from 10am to 5pm. Recently, she has been thinking about extending the flower shop’s hours an...
please I want it to step by step and in word posted so I can read...
please I want it to step by step and in word posted so I can read them. Q: If the average realized return of a portfolio is 27.5% per year, the standard deviation of returns is 50%, the portfolio beta is 1.25, the average return of Treasury bills over the same period is 2.5% per year, and the average return on the market is 12.5% per year Calculate i) the Sharpe; ii) Treynor and iii) Jensen    
I need guidance to resolve this case study, please. I do not know how to start!!!...
I need guidance to resolve this case study, please. I do not know how to start!!! Medical Computing Solutions, Inc (MCS) designs and manufactures medical grade all-in-on computer systems developed specifically for application in healthcare environment. Medical grade computer systems are developed to meet standard requirement, such as IEC 6060, as well as others that make them a better fit than the consumer grade computers for medical applications, i.e. ruggedized, easily cleanable for infection control, etc, MCS customers include hospitals,...
I want an analysis of this case. In recent years, a number of countries around the...
I want an analysis of this case. In recent years, a number of countries around the world have experienced banking crises, eroding trust in the system. Enter Bitcoin, a form of electronic currency that can be transferred from one person to another via peer-to-peer networks, without the need for a bank or other financial institution as intermediary. This ability to operate outside the banking system has made Bitcoin a favorite of hackers and buyers and sellers of illicit goods and...
I want a case study with question and answer of this topic : time value of...
I want a case study with question and answer of this topic : time value of money that include present value and future value also annuity and compound.
I want case study with question of this topic : Time value of money Risk and...
I want case study with question of this topic : Time value of money Risk and return portfolio theory
Hi! Below is the case study and I want to make sure I'm on the right...
Hi! Below is the case study and I want to make sure I'm on the right track. I bolded the questions I'm interested in (1-5). Looking for people who are familiar with the DSM-5/abnormal psychology and able to answer all questions completely. Thank you! Detailed answers extremely appreciated! Questions: 1. Diagnosis; what is the evidence for it? 2. Treatment; typical treatment used for this diagnosis AND most effective treatment. IF the person is in treatment, what should we target first...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT