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Essay / Research Paper Abstract
This 8 page paper looks at three different tools that have been developed to help value, or explain prices of traded stocks. Dividend Discount Model, Capital Asset Pricing Model and Arbitrage Pricing Theory are all briefly explained and then compared in order to assess which may be the best for practical use. The bibliography cites 6 sources.
Page Count:
8 pages (~225 words per page)
File: TS14_TEDDMAPT.rtf
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Unformatted sample text from the term paper:
are values to determine a fair price, reflecting different expectation and market condition, it has been argued that the process may be as much an art as a science. However,
despite then many potential influences there have been a number of models developed that seek to determine a logical price using a range of inputs, such as risk, or volatility,
compared to the market and the level of current or expected returns. Three models that are often debated are the capital asset pricing model (CAPM), arbitrage pricing theory (APT) and
the dividend discount model. There are a number of similarities, but when looking at which to use they have different strengths and weaknesses. To assess the models each can be
considered. If the board of Southwest or any other firm whish to determine which model is most appropriate for valuing their own shares, or those of other firms the models
need to be assessed. 2. The Models 2.1 CAPM CAPM was developed by William Shape in 1964 as an extension of the modern portfolio theory. The model expands the concept
of modern portfolio theory and is a model that allows for specific and systematic risks. This is a theory which facilitates the computation of risk and the compensations that are
due to that risk. It may be argued that systematic risk which is seen within an investment in any single asset can be minimised with a strategy of diversification;
facilitating a spread of risk to reduce the overall risk, this type of risk it is known as systematic risk. The risk of any investment is usually measured in terms
of the beta (technically it is volatility that is measured), the greater the beta the higher the potential risk and also the potential reward (Nellis and Parker, 2006).
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