The Capital Asset Pricing Model

The Capital Asset price Model
A widely reliable …nancial pose for estimating the cost of virtue capital is the Capital
Asset Pricing Model (CAPM). In this copy, the cost of equity capital (or the judge
output) is compulsive by the systematic risk a¤ecting the …rm. The mathematical formula
central the model is
r = rf + (rm ¡ rf )¯;
where r is the expected return on the …rms equity, rf is the risk-free rate, rm is the expected
return on the overall market portfolio, and ¯ is the equity beta that measures the sensitivity
of the …rms equity return to the market return.
Using the CAPM requires us to contract the appropriate measure of rf and the expected
market risk superior (rm ¡ rf ) and to calculate the equity beta. The market risk premium
canister be obtained from a time-series model for market returns. The simplest estimation is the
mediocre of historical risk premiums, which is available from various …nancial services such as
Ibbotson Associates. The equity beta is calculated as the slope coe¢cient in the regression of
the equity return on the market return. The equity beta can also be obtained from …nancial
services such as ValueLine or Merrill Lynch.
The classic empirical study of the CAPM was conducted by Black, Jensen and Scholes
(1972) and updated by Black (1993).



They show that the model has certain shortcomings:
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the estimated protective cover market line is too ‡at; the estimated intercept is high than the riskfree
rate; and the risk premium on beta is bring down than the market risk premium. To correct
this, Black (1972) extended the CAPM to a model that does not rely on the existence of a
risk-free rate, and this model seems to …t the data very hale for certain portfolios. Fama
and cut (FF, 1992) argue more broadly that there is no telling between the average
return and beta for U.S. stocks traded on the major exchanges. They …nd that the cross
section of average returns can be explained very well by two …rm characteristics: …rm...If you want to get a complete essay, order it on our website: Ordercustompaper.com



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