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Empirical Evidence: Is CAPAM the Right Model Assignment Help

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The CAPM Pricing Model requires three inputs, and they are:

  • Risk-Free Return-Return with minimal risk.
  • The Rate of Return from the Market- the market where the stock in question is being traded.
  • The beta value the risk level-b>1 signifies risk higher than the market average and b<1 implies risk below market average. Most companies’ beta lie in the 0.75 to 1.50 range.

What makes CAPM compelling?

The underlying principle of CAPM is that risky investments can be diversified in a portfolio such that the entire portfolio shares the risks. The Beta is what makes the CAPAM so unique. Investors are only interested in market risk. Beta tells managers on how to measure those risks and also translate the risks to a rate. If the profits from future do not exceed the rate, then the investment is profitable.

Our experts show illustrative examples while providing Empirical Evidence: Is CAPAM the right model Homework help. For example, suppose a company has an investment portfolio X. Project X has a beta of 0.5, and when the market rises or falls by 20%, its beta rises or falls by 10%.So the risk premium is only half of the market conditions.

Is the CAPM the right model?

This is an essential aspect of Empirical Evidence: Is CAPAM the right model Assignment help. In the real world, the Beta does not thoroughly explain the rise of fall in share prices. Another measure which is the firm’s book value to the market captures these changes very well. The discovery of the Book to market effect has affected the managers on how the risks are to be measured. Therefore the managers should include the book to market rate in their hurdle rates known as the NEER (New estimator of expected return).If investors are rationale, then Beta must not be the only measure of risk. Alternatively, if Investors are Rationale then Beta is still the best way.

Other Disadvantages of CAPM Model

When you hire Empirical Evidence: Is CAPAM the right model Assignment help, you get to know the disadvantages, including:

  • The CAPM Model assumes that the variance is adequate to measure risk, but in reality, the variance is asymmetric in nature.
  • It fails to explain in details the variation in stock returns around the world.
  • It assumes that investors would always take a lower risk. Gamblers always take a higher risk contrary to CAPM.
  • The CAPM Model assumes that there are no transaction costs or taxes involved which is always not the case.
  • There is no chance to rebalance the portfolio with time. So, in these cases of adjustment Inter Temporal CAPM is used.
  • It assumes that investors will only optimize one portfolio, but people tend to have fragmented or multiple portfolios.

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