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Essay / Research Paper Abstract
This 5 page paper considers the use of the Capital Asset Pricing Model (CAPM) to assess risk, the paper demonstrates how it may be used and compares with an alternate tool of Net Present Vale (NPV). The bibliography cites 5 sources
Page Count:
5 pages (~225 words per page)
File: TS14_TEcrecpm.rtf
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Unformatted sample text from the term paper:
sectors. Commercial banking is one of these sectors. The use of the Capital Asset Pricing Model (CAPM)is a good tool that can be sussed to asset risk, and is seen
by many as superior to Net Present Value (NPV). To understand how this may be used to assess credit risk the first stage is to considered the CAPM itself.
This was extension of the modern portfolio theory was introduced in 1964 by William Shape (Anonymous, 2001). 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 (Anonymous, 2001). 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 (Anonymous, 2001). For portfolios there
is an adjusted application, as there is not a single risk, but there is a risk profile that is not the same as the market as a whole.
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 (Anonymous, 2001). This model demonstrates that the higher rewards that are associated with the higher risks should only be present when there is no way that
this risk can be avoided (Anonymous, 2001). This is the case as whenever there is an investment made there will be a risk as this is the nature of the
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