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Essay / Research Paper Abstract
A 5 page paper comparing two asset pricing models. The capital asset pricing model (CAPM) is the standard measure for expected return on an investment. There are other pricing tools, however, specifically the arbitrage pricing model (APT). If investors have reliable information available to them that speak to their specific concerns about a specific company (i.e., the state of retail sales and reliable economic forecasts when considering whether to purchase Wal-Mart stock), then the APT is the better choice. In the absence of such accurate and specific information, the CAPM returns results more readily compared to the results gained from other CAPM-based analyses. Bibliography lists 9 sources.
Page Count:
5 pages (~225 words per page)
File: CC6_KSfinCAPMapt.rtf
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Unformatted sample text from the term paper:
pricing model (CAPM) is the standard measure for expected return on an investment. There are other pricing tools, however, specifically the arbitrage pricing model (APT). Most of those
choosing to write about the APT seem to favor it for use in estimating return on an investment, primarily because it can be tailored to the individual investors situation and
willingness to accept risk (Goetzmann, n.d.). Both the CAPM and APT require the use of assumptions. When the most accurate projection is
required or desired and the individual can identify the points of risk that s/he wants to assess, then the APT likely is the best of the two tools to use.
If the individual cannot accurately identify specific risks or how they may affect the investment under consideration, then the CAPM probably is best. The CAPM likely is the
best of the two to use for general purposes as well. Though the APT may be more accurate and it solves some of the problems of the CAPM, its
results are variable by virtue of the fact that its inputs are variable. The CAPM uses only one point of risk - beta - and so has the effect
of assessing all investments on a common ground. The results are easier to compare to each other for the purposes of choosing among investments. The CAPM is the
best choice for general use. Capital Asset Pricing Model This is an extension of the modern portfolio theory introduced in 1964 by William
Shape. This is a theory that requires the calculation of only one type and source of risk and the compensations attributable to that risk. The risk of any
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