Capital Asset Pricing Model (CAPM) was introduced in 1964 as an extension of the Modern Portfolio Theory which seeks to explore the diverse ways by which investors can construct investment portfolios through means that can possibly minimize risk levels and at the same time ensure maximization of returns.
Capital Asset Pricing Model (CAPM) was introduced in 1964 as an extension of the Modern Portfolio Theory which seeks to explore the diverse ways by which investors can construct investment portfolios through means that can possibly minimize risk levels and at the same time ensure maximization of returns.
Capital Asset Pricing Model, CAPM Assumptions, Borrowing and Lending Possibilities, Risk-Free Lending, Borrowing Possibilities, The New Efficient Set, Portfolio Choice, Market Portfolio, Characteristics of the Market Portfolio, Capital Market Line, The Separation Theorem, Security Market Line, CAPM’s Expected Return-Beta Relationship, How Accurate Are Beta Estimates?,
Capital Asset Pricing Model (CAPM)
A model that describes the relationship between risk and expected return. The general idea behind CAPM is that investors need to be compensated in two ways: time value of money & risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk gauge (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).
This slideshow is about the Capital Asset Pricing Model (CAPM),developed by William Sharpe, John Lintner & Jan Mossin in 1960. It was developed as an extension of the portfolio theory of Markowitz. It is not an individual work of mine. This is a co-work of myself & Biyanka Jayawardhana, who is a colleague of mine.
This is the fifth presentation for the University of New England Graduate School of Business course GSB711 Managerial Finance, offered by Dr Subba Reddy Yarram. This presentation examines risk, return and the Capital Asset Pricing Model (CAPM).
Capital Asset Pricing Model, CAPM Assumptions, Borrowing and Lending Possibilities, Risk-Free Lending, Borrowing Possibilities, The New Efficient Set, Portfolio Choice, Market Portfolio, Characteristics of the Market Portfolio, Capital Market Line, The Separation Theorem, Security Market Line, CAPM’s Expected Return-Beta Relationship, How Accurate Are Beta Estimates?,
Capital Asset Pricing Model (CAPM)
A model that describes the relationship between risk and expected return. The general idea behind CAPM is that investors need to be compensated in two ways: time value of money & risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk gauge (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).
This slideshow is about the Capital Asset Pricing Model (CAPM),developed by William Sharpe, John Lintner & Jan Mossin in 1960. It was developed as an extension of the portfolio theory of Markowitz. It is not an individual work of mine. This is a co-work of myself & Biyanka Jayawardhana, who is a colleague of mine.
This is the fifth presentation for the University of New England Graduate School of Business course GSB711 Managerial Finance, offered by Dr Subba Reddy Yarram. This presentation examines risk, return and the Capital Asset Pricing Model (CAPM).
The Capital Asset Pricing Model (CAPM) measures the relationship between the expected return and the risk of investing in security.
This model is used to analyze securities and price them given the expected rate of return and cost of capital involved.
Asset Pricing and Portfolio Theory
I have presented a unique analysis which showcases the concepts of Aggregate & Aggregate lending and the numerical aspects of CAPM theory
Is your presentation in need of a professional makeover? Looking to leave your audience with a lasting impression and take your presentation to the next level?
Here is what you were looking for!
This is Shahan from Bangladesh. As a designer, I have extensive graphic design experience. I can assist you with creating an eye-catching, professional, and modern presentation.
There are no limits to my services. Having 100% client satisfaction is my main goal.
Order now https://www.fiverr.com/shahan_66/design-and-redesign-a-modern-powerpoint-presentation
This presentation is an overview Cost of Capital.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
How to get verified on Coinbase Account?_.docxBuy bitget
t's important to note that buying verified Coinbase accounts is not recommended and may violate Coinbase's terms of service. Instead of searching to "buy verified Coinbase accounts," follow the proper steps to verify your own account to ensure compliance and security.
2. 2
Capital Market Theory:
An Overview
Capital asset pricing model (CAPM) will
allow you to determine the required rate of
return for any risky asset
3. 3
Capital Asset Pricing Model (CAPM)
Capital Asset Pricing Model (CAPM) is based on
observation that the returns on a financial asset
increase with the risk.
CAPM concerns two types of risk namely
unsystematic and systematic risks. The central
principle of the CAPM is that, systematic risk, as
measured by beta, is the only factor affecting the
level of return.
4. 4
Introduction
The Capital Asset Pricing Model (CAPM)
is a theoretical description of the way in
which the market prices investment assets
• The CAPM is a positive theory
6. Systematic and unsystematic risk
Specifically:
Total risk = systematic risk + unsystematic risk
CAPM says:
(1)Unsystematic risk can be diversified away. It can be avoided by
diversifying at NO cost, the market will not reward the holder of
unsystematic risk at all.
(2)Systematic risk cannot be diversified away without cost.
investors need to be compensated by a certain risk premium for
bearing systematic risk
7. 7
Diversification and Beta
Beta measures systematic risk
• Investors differ in the extent to which they will
take risk, so they choose securities with different
betas
– E.g., an aggressive investor could choose a portfolio with
a beta of 2.0
– E.g., a conservative investor could choose a portfolio
with a beta of 0.5
A measure of the sensitivity of a stock’s return to
the returns on the market portfolio
βi = Cov(Ri, Rm)/Var(Rm)
8. Risk and return
Investors need to be compensated by a certain risk premium for
bearing systematic risk
The reward-to-risk ratio for any individual security in the
market is equal to the market reward-to-risk ratio, thus:
The market reward-to-risk ratio is effectively the Market Risk
Premium which is defined as
The market is defined as a portfolio of all wealth including
stocks.
Rearranging the above equation and solve for the expected
return
]FR]M[E[R
9. The CAPM formula
So E(Ri)=Rf + βi(E(Rm) – Rf)
Rf + Units × Price.
]R][E[R
)Var(R
)R,Cov(R
R]E[R FM
M
Mi
Fi
]R][E[RR]E[R FMiFi
Number of units of
systematic risk () Market Risk Premium
or the price per unit risk
or,
10. 10
Security Market Line
The graphical relationship between
expected return and beta is the security
market line (SML)
• The slope of the SML is the market price of
risk
• The slope of the SML changes periodically as
the risk-free rate and the market’s expected
return change
11. Sample Calculations for SML
E(rm) - rf = rf =
x = 1.25
E(rx) =
y = .6
E(ry) =
Equation of the SML
E(ri) = rf + i[E(rM) - rf]
0.03 + 1.25(.08) = .13 or 13%
0.03 + 0.6(0.08) = 0.078 or 7.8%
.08 .03
Return per unit of systematic risk = 8% & the return due to the Risk free return = 3%
13. 13
SML and CAPM
If you show the security market line with
excess returns on the vertical axis, the
equation of the SML is the CAPM
• The intercept is zero
• The slope of the line is beta
14. 14
CAPM
The more risk you carry, the greater the
expected return:
( ) ( )
where ( ) expected return on security
risk-free rate of interest
beta of Security
( ) expected return on the market
i f i m f
i
f
i
m
E R R E R R
E R i
R
i
E R
15. 15
CAPM (cont’d)
The CAPM deals with expectations about
the future
Excess returns on a particular stock are
directly related to:
• The beta of the stock
• The expected excess return on the market
16. 16
CAPM (cont’d)
CAPM assumptions:
• Variance of return and mean return are all
investors care about
• Investors are price takers
– They cannot influence the market individually
• All investors have equal and costless access to
information
• There are no taxes or commission costs
17. 17
CAPM (cont’d)
CAPM assumptions (cont’d):
• Investors look only one period ahead
• Everyone is equally adept at analyzing
securities and interpreting the news
18. 18
Note on the
CAPM Assumptions
Several assumptions are unrealistic:
• People pay taxes and commissions
• Many people look ahead more than one period
• Not all investors forecast the same distribution
Theory is useful to the extent that it helps us learn
more about the way the world acts
• Empirical testing shows that the CAPM works
reasonably well
19. 19
Determining the Expected Rate of Return
for a Risky Asset
Assume: RFR = 6% (0.06)
RM = 12% (0.12)
Implied market risk premium = 6% (0.06)
Stock Beta
A 0.70
B 1.00
C 1.15
D 1.40
E -0.30
RFR)-(RRFR)E(R Mi i
E(RA) = 0.06 + 0.70 (0.12-0.06) = 0.102 = 10.2%
E(RB) = 0.06 + 1.00 (0.12-0.06) = 0.120 = 12.0%
E(RC) = 0.06 + 1.15 (0.12-0.06) = 0.129 = 12.9%
E(RD) = 0.06 + 1.40 (0.12-0.06) = 0.144 = 14.4%
E(RE) = 0.06 + -0.30 (0.12-0.06) = 0.042 = 4.2%
20. 20
Price, Dividend, and Rate of Return
Estimates
Stock (Pi) Expected Price (Pt+1) (Dt+1) of Return (Percent)
A 25 27 0.50 10.0 %
B 40 42 0.50 6.2
C 33 39 1.00 21.2
D 64 65 1.10 3.3
E 50 54 0.00 8.0
Current Price Expected Dividend Expected Future Rate
21. 21
Comparison of Required Rate of Return to
Estimated Rate of Return
Stock Beta E(Ri) Estimated Return Minus E(Ri) Evaluation
A 0.70 10.2% 10.0 -0.2 Properly Valued
B 1.00 12.0% 6.2 -5.8 Overvalued
C 1.15 12.9% 21.2 8.3 Undervalued
D 1.40 14.4% 3.3 -11.1 Overvalued
E -0.30 4.2% 8.0 3.8 Undervalued
Required Return Estimated Return
23. 23
Arbitrage Pricing Theory
Arbitrage Pricing Theory was developed by Stephen Ross
(1976). His theory begins with an analysis of how investors
construct efficient portfolios and offers a new approach for
explaining the asset prices and states that the return on any
risky asset is a linear combination of various
macroeconomic factors that are not explained by this CAPM
theory.
24. Arbitrage Pricing Theory (APT)
Arbitrage:
Zero investment:
Efficient markets:
Arises if an investor can construct
a zero investment portfolio with a
sure profit
Since no net investment outlay is
required, an Arbitrageurs can create
arbitrarily large positions to secure
large levels of profit
With efficient markets, profitable
arbitrage opportunities will quickly
disappear
7-24
25. 25
Arbitrage Pricing Theory
Similar to CAPM it assumes that investors are fully
diversified and the systematic risk is an influencing factor in
the long run. However, unlike CAPM model APT specifies
a simple linear relationship between asset returns and the
associated factors because each share or portfolio may have
a different set of risk factors and a different degree of
sensitivity to each of them.
26. 26
APT Background (cont’d)
Not all analysts are concerned with the
same set of economic information
• A single market measure such as beta does not
capture all the information relevant to the price
of a stock
27. 27
Arbitrage Pricing Theory (APT)
CAPM is criticized because of the
difficulties in selecting a proxy for the
market portfolio as a benchmark
An alternative pricing theory with fewer
assumptions was developed:
Arbitrage Pricing Theory
28. 28
Arbitrage Pricing Theory - APT
Three major assumptions:
1. Capital markets are perfectly competitive
2. Investors always prefer more wealth to
less wealth with certainty
3. The stochastic process generating asset
returns can be expressed as a linear function
of a set of K factors or indexes
29. 29
Arbitrage Pricing Theory (APT)
For i = 1 to N where:
= return on asset i during a specified time period
= expected return for asset I
= reaction in asset i’s returns to movements in a common
factor
= a common factor that influences the returns on all assets
= a unique effect on asset i’s return that, by assumption, is
completely diversifiable in large portfolios and has a
mean of zero
= number of assets
ikikiiiii bbbERi ...21
Ri
Ei
bik
k
i
N
30. 30
Arbitrage Pricing Theory (APT)
Multiple factors expected to have an impact
on all assets:
• Inflation
• Growth in GNP
• Major political upheavals
• Changes in interest rates
• And many more….
Contrast with CAPM insistence that only beta
is relevant
31. 31
Arbitrage Pricing Theory (APT)
Bik determine how each asset reacts to this common
factor
Each asset may be affected by growth in GNP, but
the effects will differ
In application of the theory, the factors are not
identified
Similar to the CAPM, the unique effects are
independent and will be diversified away in a
large portfolio
32. 32
Arbitrage Pricing Theory (APT)
APT assumes that, in equilibrium, the return
on a zero-investment, zero-systematic-risk
portfolio is zero when the unique effects are
diversified away
The expected return on any asset i (Ei) can
be expressed as:
33. 33
Example-Portfolio beta and risk premium
Consider the following
portfolio:
A) Calculate the risk
premium on this portfolio
B) Calculate the total
portfolio risk if Market risk
premium is 7.5%.
Asset Beta
Risk
prem.
Portfolio
Weight
X 1.2 9% 0.5
Y 0.8 6 0.3
Z 0.0 0 0.2
Port. 0.84 1.0
35. 35
Example-risk premium
Suppose the risk premium of the market portfolio
is 8%, with a st. dev. Of 22%.
Calculate A) The Portifolio’s Beta and B) the risk
premium of the portfolio referring to a portfolio
invested 25% in x motor company with beta 0f
1.15 and 75% in y motor company with a beta of
1.25.