Here is the synopsis of our sample research paper on Capital Asset Pricing Model Questions. Have the paper e-mailed to you 24/7/365.
Essay / Research Paper Abstract
This 5 page paper looks at three aspects of the capital asset pricing model, CAPM, firstly discussing the equation and its' components, secondly looking at if total risk can be diversified away and lastly looking at the criticisms of CAPM as a model of return for a company. The bibliography cites 5 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TEcapass1.rtf
Buy This Term Paper »
Unformatted sample text from the term paper:
William Shape (Mackinlay, 1995). 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 (Mackinlay,
1995). 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 (Kerr, 1997, Howells and Bain, 1998). 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 (Mackinlay, 1995). This model demonstrates that the higher rewards that are associated with the
higher risks should only be present when there is now way that this risk can be avoided (Mackinlay, 1995). This is the case as whenever there is an investment made
there will be a risk as this is the nature of the market (Kerr, 1997). When we apply the CAPM there is a
simple formula, this is where E(R) is the rate of return that is expected on any single stock, r is the risk free investment rate, ERP is the additional equity
risk premium. The formula looks like this (Price, 1998); E(R) = r + (ERP x beta ) This formula is also an extension
of mean variance theory, but can be used to test the model. An example of how this may work out is given. If we assume a company with a beta
...