CAPM Model

The correlation coefficient is a standardized measure of the relationship between two variables ranging from - 1.00 to +1.00 (Brown and Reilly, 2009, p. 1016) This is a statistical concept: a high positive correlation In other words, FTSE 100 has a high positive correlation with FTSE 350 if the upward (increase) or downward (decrease) change of an asset tends to go up and down to another asset.

The Capital Asset Price Model (CAPM) is an important model in financial theory. CAPM is theoretical or model usage (usually called stock or stock) used to calculate the portfolio risk and the expected rate of return. All stocks have two risks. Systemic risk (also called market risk affecting each stock) and non-systematic risk (also called specific risk or unique risk only affecting individual stock). To distribute non-systematic risks, we have selected different shares that are negatively related to each other and put them together in one portfolio. This greatly eliminates the risk. Please look at the picture below

(CAPM) model takes account of the accuracy of the market portfolio broker's choice and the difference in securities yield is the only appropriate cause of systematic risk. Therefore, the portfolio of securities or the risk premium of an individual security is considered a function of systematic risk and can be measured by the appropriate benchmark index beta. In contrast, Fama and French (1993) changed the capital asset price model (CAPM) to three factors. First, the portfolio explains that the company's return is opposite to the high market value ratio. Second, the portfolio shows the difference in expected earnings of SMBs (SMBs). Finally, the risk premium for securities is a major factor in the risk of being organized and can be measured in beta. In addition, Carhart (1997) added a new factor to Fama's and France's risk revenue, bringing the fourth factor, price momentum factor.

The Fama and France three element model extends CAPM by increasing the scale and value elements beyond the CAPM market risk factors. This model takes into account the fact that value shares and small cap stocks regularly outpace the market. Fama and France tried to measure and measure the price-earnings ratio in different ways, and found that value shares outperformed growth stocks and small stocks tended to show large stocks. As a result, the portfolio with many small caps or value stocks was superior to the large cap and growing stocks, but it was lower than the CAPM result. This is because the three element model adjusts the small cap and its value exceeds the performance. However, the three-element model is considered to be a better model than the corresponding model because it adjusts the trend indicated by including two additional elements.