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CAPM
- 2. RETURN IS AFUNCTION OF RISK
- 3. 5% return per year 5%return per year Risky company
- 4. Can you convincehim to draw his money from the bank and invest it in your business?
- 5. 5% return per year 5%return per year Risky 8% return per year
- 6. How much averagepercentage return should you offer him to make his investment worth his risk in the risky company?
- 7. COST OF EQUITY Howis it calculated under CAPM Model? ke = Rf + β (Rm – Rf)
- 8. CAPM TRADE OFF RISK RETURN DIVERSIFIAB LE NON-DIVERSIFIABLE
- 11. OVERVIEW We have expectationof extra reward for taking up more risk. An asset risk premium is the additional compensation required above the risk- free rate for holding that asset. At the market level, the market-risk premium is the additional return above the risk-free rate to hold the market portfolio for a given asset.
- 13.
- 14. Where, rp = expectedreturn of portfolio rf = risk free rate of return rm = market rate of return σp = standard deviation of portfolio σm = standard deviation of market
- 16. Where, ρim = correlationcoefficient of security and the market σi = standard deviation of security σm = standard deviation of the market COVim = covariance of security and the market
- 17. Systematic risk ofassets Market risk
- 18.
- 19.
- 23. ADVANTAGE Considers Systematic Risk Describes the relationship between systematic risk andreturn Helps to evaluate the market return of the stock Applicable to all companies if we can calculate β Simple to understand
- 24. DISADVANTAGE Need to Estimate expected market risk Difficultin Calculating Beta (β) and they are unstable through time All about predicting future Applicable to all companies only if we can calculate β Difficulty in testing its validity
- 25. CONCLUSION What is CAPMin Simple words? What is beta (β) in simple words ? 10% more volatility Graph Line of XYZ Company Market Volatility
- 26. NEVER DEPEND ONSINGLE INCOME. MAKE INVESTMENT TO CREATE A SECOND SOURCE. WARREN BUFFET
Editor's Notes
- #13 Talk about efficient frontier related with risky securities only Relate with market ma there are both risky and risk free assets
- #14 Risk free and risky securities The CML is tangent to the efficient frontier curve which gives the optimum portfolio point The formula that gives these points to plot is in next slide
- #15 CML includes standard deviation. i.e. both systematic and unsystematic risk Defined both risks Unsystematic risk can be diversified so market only rewards the systematic risks
- #16 Beta compares the security’s volatility with the industry
- #18 Beta <>= 1 +1 -!
- #21 Explain this example
- #22 Security market line
- #23 When we are well known about the diversification this quote of an American Investor , Warren Buffet makes a very good sense which teach us to diversify the product.
- #24 Considers systematic risk, assumption garne ho bhane ta it will take decades to realize which one is better option but systematic risk le garera its helpful to assume certain point while unsystematic risk bhaneko bhai pari aune kura ho This concept help us to understand the possible risk according to market and it helps us assume the requires rate of return .
- #26 CAPM can be denoted as a basic concept that if we have the higher risk then we must set certain required rate of return to put an option to choose That risky option compared to less risky and risk free option. Beta is nothing but a rate of additional volatility of investment option in this case, the beta can be called 1.1 this means 10% riskier when the slope is downward and 10% profitable when the slope is upward.