Question

Explain the Capital Asset Pricing Model (CAPM) .

1. Comparing the buy and hold strategy, constant weighing strategy, and dynamic allocation strategy.

Answer 1

1. Capital Asset pricing model is a model which will be used to finding the expected rate of return,when we are making an investment because it will be finding the expected rate of return based upon risk free rate as well as after consideration of Beta of the Asset which will be representative of systematic risk related to the Asset and will also be considering the risk premium which will be a difference between the risk free rate and market rate of return.

Expected rate of return=risk free rate+(beta X market risk premium)

Capital Asset pricing model will be representing beta & it will represent the systematic risk associated with investment and it is highly used in Real world.

2. Buy and hold strategy is related to buying an investment and holding it for higher period of time and longer period of time in order to maximize the rate of return.

Dynamic allocation is constantly changing the overall allocation of portfolio according to changing demands and supply in the column in order to maximize the rate of return and it will constantly synchronise portfolio in relation to the overall market Trend.

Constant weighting of the portfolio is meaning that it will be trying to provide the similar status to the portfolio during every economic situation and trying to maintain the similar weight of two different asset classes so that diversification is properly maintained.