MODULE CODE: FC30-3
CAPITAL ASSET PRICING MODEL
HUMERA MOHAMMAD SHAHID MOHAMMAD SHAFI (2010120)
AYSHA ABDUL AZIZ AL BASRAWI (2010113)
CAPITAL ASSET PRICING MODEL
When an investor invests in market, he expects high returns with high risk. As an investor it is very difficult to get rid of all the risk, if he expands his investments. They deserve a rate of return that satisfies them for taking on risk. Risk and return are connected to each other. Investors use a model to calculate how much return he will get and how high would be the risk. The model is called CAPM.
CAPM refers to as capital asset pricing model which can be ...view middle of the document...
The report also gives a review of the existing literature on the application of CAPM in various markets. It also identifies the factors that determine the beta and the limitations of applying the CAPM. Moreover the report consists of methodology of how the data is collected. It also gives the calculation of returns on monthly data and as well as beta coefficient. Furthermore, an appropriate analysis is given on the basis of the calculation of returns and beta. Finally the report concludes with a brief summary.
According to Pettit, R.R. and Westerfield, R., (1974) the appeal of CAPM is it gives strong predictions on how risk can be measured as well as the relationship between risk and return. As we know risk and return are interconnected and both are very significant variable changing investment alternatives. There is a possibility that an investment’s certain results will not conflict with the expected results.
Beta is a measure of systematic risk. It is a standardized measure between two variables which is market return and individual security return. Beta is the most important concept of CAPM. In other words beta is a direct relationship of volatility between any one of the asset which have high beta will increase in price greater than the market.
Unknown, (2012) has argued that the relationship between risk and return is a direct relationship. If investors invest more in their investments the return will be more and it will be more risky. It has been perceived if the risk is high the return on investment will also be high. It means that if one element (return) increases automatically other element will also increase (risk). Investors are even pleased with the second option if they invest less they would not expect much of return so the level of risk will also decrease. Although the degree of risk is affected from return on investment, investors should be able to fix the proper return for the level of risk.
Bollerslev, T. Engle,R. F. and Wooldridge, J.M., (1988) stated that an investment involves two main principles for entire investors: the amount of return predicted on their investments and the risk that comes with investment. An investor mostly desires to have less risk and more returned from their investments, but in real it is not possible. The higher will be the return, more risky it will be. Thus Perold,A.,(2004) states that the relationship between risk and return is a financial relationship, because on investment it affects the expected return.
Tsopoglou, S., Michailidis, G., Papanastasiou, D. and Mariola, E., (2006) have examined the Capital Asset Pricing Model for some companies in Greek to find out the relationship between risk and return. The authors found out that it doesn’t supports to the theory’s statement that higher risk is linked with higher levels of return. The relationship between beta and return is not linear. The results they’ve obtained were indicating that higher risk that didn’t give high...