Shaktizshura Extensive use of chart, graphs and diagrams. Capital Budgeting — Techniques of Evaluation. Your Personal Pinnacle of Success. Principles and Practice of Management.
|Published (Last):||25 March 2013|
|PDF File Size:||1.2 Mb|
|ePub File Size:||16.17 Mb|
|Price:||Free* [*Free Regsitration Required]|
Empirical Tests of the CAPM The studies generally showed a significant positive relationship between the expected return and the systematic risk. But the slope of the relationship is usually less than that of predicted by the CAPM. The risk and return relationship appears to be linear. The CAPM theory implies that unsystematic risk is not relevant, but unsystematic and systematic risks are positively related to security returns.
The ambiguity of the market portfolio leaves the CAPM untestable. If the CAPM were completely valid, it should apply to all financial assets including bonds. CAPM provides basic concepts which is truly of fundamental value. The CAPM has been useful in the selection of securities and portfolios. Given the estimate of the risk free rate, the beta of the firm, stock and the required market rate of return, one can find out the expected returns for a firms security. Arbitrage Arbitrage is a process of earning profit by taking advantage of differential pricing for the same asset.
The process generates riskless profit. In the security market, it is of selling security at a high price and the simultaneous purchase of the same security. The investors have homogenous expectations. The investors are risk averse and utility maximisers. Perfect competition prevails in the market and there is no transaction cost.
Arbitrage Portfolio According to the APT theory, an investor tries to find out the possibility to increase returns from his portfolio without increasing the funds in the portfolio. He also likes to keep the risk at the same level. The sensitiveness of the securities to any factor is the weighted average of the sensitivities of the securities. Weights are the changes made in the proportion. For example bA, bB and bC are the sensitivities, in an arbitrage portfolio the sensitivities become zero.
The macro economic factors are: growth rate of industrial production, rate of inflation, spread between long term and short term interest rates and spread between low grade and high grade bonds. The APT model takes into account of the impact of numerous factors on the security.
The market portfolio is well defined conceptually. In APT model, factors are not well specified. There is a lack of consistency in the measurements of the APT model. The influences of the factors are not independent of each other.
CAPM & APT
Taxmann's Fundamentals of Financial Management for B.COM (HONS) by RP RUSTAGI Edition 2019