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Essay / Research Paper Abstract
This 28 page paper is an in-depth look at the capital asset pricing model. The paper begins with an examination of what the model is and what it means for investors. The paper then considers how the model has developed, a literature is conducted for more recent studies that either add more knowledge to the sue of CAPM or indicate its’ redundancy. Particular attention is paid to Fama and French. The bibliography cites 21 sources.
Page Count:
28 pages (~225 words per page)
File: TS14_TECAPM02.rtf
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Unformatted sample text from the term paper:
model was developed recognition needs to be granted to Harry Markowitz. Markowitz undertook work that developed the mean variance model, this is the foundation upon which Sharpe was later to
develop the capital asset pricing model (CAPM). Researchers that examined the mean variance model made a key determination that changed the way investment theory was seen. The model was
an idealised model, the total risky assets were all placed in one investor opportunity group, there was also a single investment that was riskless. This made it possible for the
investors to make a choice with the investors that wanted to avoid risk able to do so, and those that embraced risk also able to do so, with the tangent
providing a range of risk free and risky investment choices to the other investors (Bernstein, 1993). In looking at this model, if it assumed that the investors could borrow
funds at the riskless rate then it becomes apparent, and is shown in the diagram below that all investors would want the same portfolio with the risky assets (Goetzmann, 1997).
This is shown at the point of tangency in figure 1, where risk and reward are optimised in the idealised portfolio (Goetzmann, 1997). The key to success for any investment
manager would then be the identification of that portfolio of the worlds available assets (Goetzmann, 1997). E is the return, STD is the standard divination R floor is the risk
floor. Figure 1 (Goetzmann, 1997). This is known as the tangency portfolio, and it become a central aspect of a classical finance model in investment research (Goetzmann,
1997, Bernstein, 1993). Along with this theory is the "Two Fund Separation Theorem", this made that argument that investors will make their investment choice based on two fund choices, that
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