Capm

In: Business and Management

Submitted By 4991
Words 1863
Pages 8
‘The Capital asset pricing model (CAPM) is a very useful model and it is used widely in the industry even though it is based on very strong assumptions. Discuss in the light of recent developments in the area.’

MN 3365
Strategic Finance
Table of Contents
Introduction
Concept of CAPM
Assumptions of CAPM .
Other Suggested Models
Disadvantages of CAPM
Advantages of CAPM
Problems in applying CAPM
Conclusion
Bibliography / References

INTRODUCTION

This essay will highlight the use of Capital asset pricing model ( CAPM ) to be considered as a pricing theory model for assets . CAPM model helps investors to analyse the risk and what expectation to keep from an investment (Banz , 1981) . There are two types of risk associated with CAPM known as systematic and unsystematic risk . The systematic risks are market risk which cannot be diversified such as fluctuations in interest rates and recession in the economy .Unsystematic risk are risks associated with an individual stock , it occurs when an investor increases the number of stocks on his portfolio. The unsystematic risk cannot be diversified as it is related an individual stock irrespective to the general market . (Amihud and Lev, 1981). The CAPM was introduced independently by Jack Trenor (1961 , 1962) , Jan Mossin (1996) and William F . Sharpe (1964) , it is basically an uplifment of the existing work of Harry Markowitz on modern portfolio therory as well as diversification which was given a name as CAPM (Investopedia , 2003). After approximately 4 decades of CAPM being introduced , it is still widely used by investors to determine the rate of return required by an investment . After its wide use in the recent times , there are statements which contributes towards the criticism of CAPM . This essay will discuss the concept behind CAPM , assumptions , advantages , disadvantages and…...

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