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Essay / Research Paper Abstract
This 6 page paper is written in 2 parts. The first part looks at Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) and considers which model would be most appropriate for a financial professional to use. To assess this both models are described and the evidence to support them considered. The second part examines what is meant by a beta and applies it to a real company; Sento Corp, and then considers which other companies may be chosen if the criteria was a similar beta. The bibliography cites 5 sources.
Page Count:
6 pages (~225 words per page)
File: TS14_TEaptcapm.rtf
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Unformatted sample text from the term paper:
to assess the shares which may make good investment purchases a range of theories have been developed, two major theories are Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory
(APT). Either of these can be used an approach by a financial professional, to determine which may or may not be the best approach we need to examine these models.
CAPM was extension of the modern portfolio theory was introduced in 1964 by William Shape. The way in which it expands
of the idea of the modern portfolio theory is in the way it allows for specific and systematic risks. This is a theory that allows for the calculation of risk
and the compensations that are due to that risk. The systematic risk of any single asset can be reduced by the investor or fund manger ensuring that there is diversification
within the investment fund. This spread of risk reduces the overall risk of the fund, this is known as systematic risk. The risk of any investment is usually measured
in terms of the beta, the greater the beta the higher the potential risk and also the potential reward. In this
theory there is a compensation to be gained form taking this systematic risk, but if a singe company is invested in then there will be a specific risk, and it
is this specific risk that the market does not compensate for. The reasons for this is that this specific risk can be diversified away. The model does make some assumptions
these are that there are no costs involved in the transactions such as taxes, stamp duties or sales costs, that all investors will have the same investment profiles, expecting
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