Capital Asset Pricing Model

Finance is an essential element to succeed in all organizations. It includes a number of monetary theories that have been developed over the years, depending on the time, money, special circumstances of supply and demand. One important financial theory is the capital asset pricing model that allows investors or companies to invest more realistically by considering market risk. In this article, I will outline the capital asset pricing model, then explain the theoretical basis of CAPM and end evaluation of CAPM.

Sabal (2001) provides four models to calculate capital costs in companies in emerging countries, namely the International Capital Asset Price Model (ICAPM), Improved International Capital Asset Price Model (MICAPM), Godfrey and Espinosa (1996) doing. Model and Arbitrage Transaction Price Theory (APT) ICAPM and MICAPM can not be used because they need to list the company's shares, but the shares of Paginas Amarelas are not traded as they are part of a large complex. Therefore, it is impossible to determine meaningful β for Paginas Amarelas required for meaningful ICAPM and MICAPM. Due to lack of trading and inefficiency of capital markets, the revenue required in the regional market may be inaccurate. Another reason why ICAPM can not be used is because it assumes that the market is fully integrated so that the same revenue must be obtained for assets of the same risk.

Since 1970, finance companies have used the capital asset pricing model (CAPM) to calculate their portfolio performance and capital cost. However, there are many models of asset pricing that must identify the risk of assets, and many researchers have found that Mossin (1966), Sharp (1964), Sharp (1964), Lintner (1965) We measure the risk premium of each unit in the whole asset and calculate the asset risk by measuring the average of market beta. Therefore, the CAPM module has a linear relationship between the market beta and the risk premium of the asset, which can be considered a systematic risk. In addition, CAPM shows that the asset return rate varies depending on the asset market beta. (Fazil, 2007)

The capital asset pricing model uses the concept of linear regression and beta to analyze and quantify the systemic risk of investment. This comes directly from the beta coefficient of a linear regression model that associates the ROI with the return of all risk assets. Linear regression is a major empirical tool in economics. For example, it is used to predict consumption expenditure, fixed investment expenditure, inventory investment, domestic export purchase, import expenditure, liquidity needs retention, labor demand and labor supply.