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Answer The CAPM is a model for pricing an individual security (asset) or a portfolio. For individual security perspective, we made use of the security market lin…e (SML) and its relation to expected return and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class. The SML enables us to calculate the reward-to-risk ratio for any security in relation to that of the overall market. Therefore, when the expected rate of return for any security is deflated by its beta coefficient, the reward-to-risk ratio for any individual security in the market is equal to the market reward-to-risk ratio (MORE)

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It considers only systematic risk, reflecting a reality in which most investors have diversified portfolios from which unsystematic risk has been essentially el…iminated. It generates a theoretically-derived relationship between required return and systematic risk which has been subject to frequent empirical research and testing. It is generally seen as a much better method of calculating the cost of equity than the dividend growth model (DGM) in that it explicitly takes into account a company’s level of systematic risk relative to the stock market as a whole. It is clearly superior to the WACC in providing discount rates for use in investment appraisal. (MORE)

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It helps to explain the costs of capital by creating a model which intuitively understands the cost of capital as a function of a small number of well-understood economic vari…ables, such as interest rate, demand, future discount, and capital stock. (MORE)

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The model's message is that an investmentÕs risk premium varies in direct proportion to its volatility compared to the rest of an efficient, competitive market. Capital A…sset Pricing Model is a numerical model that explains the connection between risk and return in a rational equilibrium market. (MORE)

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The Constant growth model does not address risk; it uses the current market price, as the reflection of the expected risk return preference of investor in marketplace, whereas… CAPM consider the firm's risk, as reflected by beta, in determining required return or cost of ordinary share equity. Another difference is that when constant growth model is used to find the cost of ordinary share equity, it can easily be adjusted with flotation cost to find the cost of new ordinary share capital. whereas CAPM does not provide simple adjustment. Although CAPM Model has strong theoretical foundation, the ease of the calculation of the constant growth model justifies it use. (MORE)

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capital:-profits made by a company which is used to extend its business further for ex. money required to buy resources such as power,raw material,benefits to share holders as… incentives,payment to employees. assets:-assets are something of moral importance for a company to get goings in terms of business for ex any pool of employees can be an asset for company or for a loan taker his home can be an asset such that by selling it he get same money he had taken the loan or a company's share holders can be the assets . alternately, assets generates capital in form of cash. (MORE)

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Solve the following problem: Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices show here: Security Pric…e Today Cash Flow in One year Cash Flow in Two years B1 94 100 0 B2 85 0 100 a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years? b. What is the no-arbitrage prices of a security that pays cash flows of $100 in one year and $500 in two years? c. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a price of $130. What arbritrage opportunity is available? (MORE)

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ADVANTAGES OF THE CAPM The CAPM has several advantages over other methods of calculating required return, explaining why it has remained popular for more than 40 years: It con…siders only systematic risk, reflecting a reality in which most investors have diversified portfolios from which unsystematic risk has been essentially eliminated. It generates a theoretically-derived relationship between required return and systematic risk which has been subject to frequent empirical research and testing. It is generally seen as a much better method of calculating the cost of equity than the dividend growth model (DGM) in that it explicitly takes into account a company's level of systematic risk relative to the stock market as a whole. DISADVANTAGES OF THE CAPM The CAPM suffers from a number of disadvantages and limitations that should be noted in a balanced discussion of this important theoretical model. Assigning values to CAPM variables In order to use the CAPM, values need to be assigned to the risk-free rate of return, the return on the market, or the equity risk premium (ERP), and the equity beta. The yield on short-term Government debt, which is used as a substitute for the risk-free rate of return, is not fixed but changes on a daily basis according to economic circumstances. A short-term average value can be used in order to smooth out this volatility. Finding a value for the ERP is more difficult. The return on a stock market is the sum of the average capital gain and the average dividend yield. In the short term, a stock market can provide a negative rather than a positive return if the effect of falling share prices outweighs the dividend yield. It is therefore usual to use a long-term average value for the ERP, taken from empirical research, but it has been found that the ERP is not stable over time. In the UK, an ERP value of between 2% and 5% is currently seen as reasonable. However, uncertainty about the exact ERP value introduces uncertainty into the calculated value for the required return. Beta values are now calculated and published regularly for all stock exchange-listed companies. The problem here is that uncertainty arises in the value of the expected return because the value of beta is not constant, but changes over time. Using the CAPM in investment appraisal Problems can arise when using the CAPM to calculate a project-specific discount rate. For example, one common difficulty is finding suitable proxy betas, since proxy companies very rarely undertake only one business activity. The proxy beta for a proposed investment project must be disentangled from the company's equity beta. One way to do this is to treat the equity beta as an average of the betas of several different areas of proxy company activity, weighted by the relative share of the proxy company market value arising from each activity. However, information about relative shares of proxy company market value may be quite difficult to obtain. A similar difficulty is that the ungearing of proxy company betas uses capital structure information that may not be readily available. Some companies have complex capital structures with many different sources of finance. Other companies may have debt that is not traded, or use complex sources of finance such as convertible bonds. The simplifying assumption that the beta of debt is zero will also lead to inaccuracy in the calculated value of the project-specific discount rate. One disadvantage in using the CAPM in investment appraisal is that the assumption of a single-period time horizon is at odds with the multi-period nature of investment appraisal. While CAPM variables can be assumed constant in successive future periods, experience indicates that this is not true in reality. (MORE)

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While the 2011 model of the BMW X5 has a starting Manufacturer's Suggested Retail Price (MSRP) of $46,300, the 2012 model's starting MSRP is $47,200. So the difference is less… than $1,000. (MORE)

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The Capital Asset Pricing Model is a pricing model that describes the relationship between expected return and risk. The CAPM helps determine if investments are worth the ris…k. (MORE)