Capital asset pricing model

Alternative Asset Pricing Models Arbitrage Pricing Theory (APT) was developed by Stephen Ross (1976) as an alternative model to overcome some of the weaknesses that have been found in the CAPM. The APT is based on the Law of One Price. This means that if two assets have the same risk, theoretically they should have the same expected returns. If their expected returns differ, arbitrageurs would be able to create a long-short trading strategy that would have no initial cost, but would provide…

Theoretical literature review The Capital Asset Pricing Model (CAPM) was formulated by Sharpe (1964) as well as Lintner (1965) following the work of Markowitz (1959). Since then it has produced amazing achievement because its simplified approach attracted many researchers. In spite of numerous criticisms concerning the validity of the CAPM, it is broadly used in the field of financial economics. Alternatively we have the Arbitrage Pricing Theory (APT), being a less limiting model as opposed to…

Markowitz (1952, 1959) and Roy (1952). According to Markowitz (1952), risk can be eliminated through diversification by spreading the wealth across the assets. In his work, Markowitz (1959) implemented the theory of mean-variance of market portfolio which provided the initial foundation for capital asset pricing model. His model was a static model which assumed that investors tend to invest in a portfolio at time t-1, and gave stochastic return in the period t. One of the main assumptions in…

The main focus of the paper is on the two factor model of Liu (2006) using the current CRSP accumulation of the trading volume data daily during the time period of 1926 to 1962. The literature based on liquidity has been divided into three segments in the past studies conducted which are: Firstly, the search for liquidity proxies which has been conducted by Amihud and Mendelson (1986) where they suggest the bid ask spread measure and the research done by Datar et al. (1998) use turnover as an…

The weighted average cost of capital, commonly referred to as WACC, is an important and widely accepted tool for companies to use. WACC allows the company to value future projects and the company as a whole by proportionately weighing each category of capital; because of this a firm’s WACC is dependent on the capital structure of the firm. Investors also use this tool to confirm whether or not companies are worth the investment risk. The higher the WACC, the higher the investment risk of a…

Portfolio Theory only consists of systematic or uncontrollable risks. The reason was because not all the investment having the same degree of risk. Therefore, Modern Portfolio Theory was consisted of two theories which are Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). CAPM was created…

Figure 1 shows a Capital Market Line (CML), this line represents the relationship between risk and expected return of efficient portfolio that contains both risky and risk free assets. . The starting point of the CML shows the risk free return where the target return is 0.0036 with a standard deviation of 0.00018 (zero). The optimal market portfolio is where the target return is 0.0208 and the standard deviation is 0.03578. at this tangent point, the best portfolio for investors is generated.…

do and had her own discounted cash flow forecast developed. As she was still unsure of her findings she had her assistant, Joanna Cohen, estimate Nike’s cost of capital. Cohen used WACC, weighted average cost of capital for the estimate of 8.3. WACC is the weighted average cost of capital. Its calculations consist of a firm’s cost of capital in which each category of…

companies. Moreover, the risk lowering capabilities of ESG practices should receive further attention from academics. The pricing anomaly connected to high ESG scoring firm should be covered from future studies. Given the changing economic and social landscape, the reasons behind higher financial performance for CSR practice needs to be updated. This could result from higher capital inflow towards ESG-focus companies and not necessarily from the selection of investors and consumer over the…

this report used two-stage discounted cash flow (DCF) model. This model is chosen considering that Graincorp is in the mature stage, with the characteristics of paying high dividends and has a high leverage. Moreover, management stated that they are building another silos by this year, so it is assumed that Graincorp will have an increasing growth for several periods and will drop to the stable growth afterwards. Hence, the first stage of this model would be the increasing phase for 5 years and…