Thesis on capm and its applications

Accordingly, the objective is to understand the prices or values of claims to uncertain payments. XIII The central aspect is the risk-return tradeoff. It is rational that investors demand additional return for an asset incorporating more risk. This relationship can also be empirically examined when looking at the return development of different assets.

Thesis on capm and its applications

Hence, alpha is determined by the fundamental values of the company in contrast to beta, which measures the return due to its volatility.

Also note that, if the alpha is negative, then the portfolio underperforms the market.

Thesis on capm and its applications

Table One presents the estimated alpha coefficients and the p values. Sample size for the regression is for time period one and for time period two respectively and period two is a sub period of period one.

The following conclusions can be drawn from the table one and two available in appendix: Six out of twenty-five are negative which suggests that these portfolios cannot reach the expected return of market level.

Thesis on capm and its applications

Twelve of twenty-five have p value smaller than 0. The results of other thirteen portfolios confirm that the intercept is statistically insignificant upholding the CAPM theory that alpha is zero. Besides, it is observed that the p value of alpha in fourteen portfolios is smaller than 0.

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Similarly, the results of the intercepts of the remaining 11 portfolios show us that it cannot reject the hypothesis of zero alpha. Also in Table 1 and Table 2, interesting remarks can be derived from the following evidence based on the estimated beta coefficients and their p values: All betas are statistically significant p value less than 0.

In CAPM, it points out that higher systematic risk beta would lead to higher level of return.

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However, in this study, higher estimated beta portfolios are not associated with higher excess returns. Portfolio one for example, has the highest beta 1. In contrast, portfolio 13 has relatively lower beta 1. But it produces a higher and positive excess return 0. Portfolio 4 has an estimated beta of the unit value which implies it has the same volatility as the market, other 17 having a superior to one, which therefore has a higher volatility than the market.

Similarly, in this case, higher estimated beta is not necessarily correlated to higher excess return which can be shown more clearly in the following plots. This evidence can be seen in portfolio 1 with beta 1.

We do cross-sectional test is to identify whether the above statement is true with our two data set and whether or not it rejects the hypothesis that the slope is zero. The results have shown in Table 3that gamma1 in time period 1 is positive 0.

The gamma0 is also positive 0.

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In time period 2, gamma 0 is positive 1. In this case, the p value of gamma 1 is 0. Therefore, the model is interpreted as being false. The CAPM is rejected by the fact that the slope in period two is not statistically significant.

These two curves are both wave-like pattern but not exactly follow the same movement. As discussed in previous section, higher stimated beta is not always necessarily correlated to higher excess return. These graphs are more vivid to illustrate this point. Majority portfolios follows the rule that higher beta is linked to bigger excess return.

But special cases may be seen as portfolio one, six etc. But portfolio one seems to be an extreme case as well as it has the highest beta among the 25 portfolios with the lowest excess return discussed in previous beta section.•Explain how the CAPM assists in measuring both risk and return.

•Explain how the CAPM assists in calculating the weighted average costs of capital (WACC) and its components. Economics and Finance Dissertation INTEREST RATE SENSITIVITY OF STOCK RETURNS Acknowledgements I would like to thank my supervisor Dr.

Illias . CAPM was introduced by Sharpe, Linter and Mossini and four decades later is still widely used in applications, as the evaluation of managed portfolios formalized one of the important and majors problems in finance,the quantification of the trade-off between.

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Limitations of the Capital Asset Pricing Model (CAPM) - Criticism and New Developments - Manuel Kürschner - Research Paper (undergraduate) - Business economics - Banking, Stock Exchanges, Insurance, Accounting - Publish your bachelor's or master's thesis, dissertation, term paper or essay.

that questions the “real world application” of the APM Theorem and its ability to explain stock returns as well as value premium effects in the United States market. This thesis provides an out-of-sample perspective to the work of Fama and French (, ).

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