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Essay / Research Paper Abstract
This 8 page paper looks at 3 different models, or extensions of models that may be argued as having their foundation in the work of Markowitz’s modern portfolio theory. Three variations of the CAPM are examining, including work by Fama and French and Black and Scholes. Each model is explained. The bibliography cites 9 sources.
Page Count:
8 pages (~225 words per page)
File: TS14_TEexcapm.rtf
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Unformatted sample text from the term paper:
basic theories, and therefore one which has been highly influential in subsequent developments, as being that of Markowitz, who developed the concept of modern portfolio theory. This has been built
on by many theorists, some models have been stronger than others, with some gaining a high level of attention and gaining dominance, as seen with the capital asset pricing model
(CAPM). However, even the subsequent models have been subject to revision. By considering some of the theories that have developed as a result of Markowitz it is possible to consider
the high influence it has had as well as assess the way in which investment theory has developed in some of the more complex models which have emerged. The first
development we will consider, is that of Fama and French, who have been more widely acknowledged for the development of efficient market hypothesis. However, they have looked at CAPM and
developed this further looking at other influences that appeared to have an impact on the performance of a stock. Their work, which was first published in 1992, developed a model
with three factors. As well as market risk they also identified the factors of size and value as being significant influences (Borchert et al, 2003). These two factors were constructed
as SMB to deal with the size risk and HML to deal with the value risk. SMB is short for small minus big, this is the factor that is
used to measures the returns that have often been observed for investors for stocks in companies that have had a relativity small market capitalisation (Borchert et al, 2003). This return
is also referred to as the size premium (Borchert et al, 2003). The SMB is calculated monthly based on the average return created by the smallest 30% of the stocks
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