Introduction
Economic models are always intended to simplify the real-world complex economic issues and provide efficient information to the users, and such role is taken by Capital Asset Pricing Model (CAPM) as well. The CAPM is the key theory in the stock market and industries; it is widely used by analysts, investors and corporations. In this essay I am going to discuss the recent developments about the CAPM, and refer to both advantages and disadvantages. Capital Asset Pricing Model

The initial development of the CAPM was building upon Markowitz’s idea, and the model was further developed by Sharpe, Treynor, Lintner, Mossion in 1960s. Basically, the Capital asset pricing model shows the theory of the relationship between risks and returns which state that the expected risk premium on any security equals its beta time the market risk premium. (Brealey/Myers/Marcus, 2009) In other word, the CAPM laid the basis for modelling the risk-return relationship, it is considered as the central theory that links risk and return for all assets and it is based on very strong assumptions.

The reasons of why the CAPM became so popular and has been widely used since it has been introduced to the market are not only due to the simple form and easy to understand, but also due to the wide range of applications. 1.Calculates the expect rate of return

The basic idea behind the model is that the investors expect a reward for both waiting and worrying, thus the CAPM has a simple interpretation, which are the expected rates of return required by investors rely on two things: •Compensation for the time value of money which indicates by the risk-free rates •A risk premium, which depends on beta and the market risk premium. The investors is rewarded with the risk premium for taking on the risk associated with the investment 2. Contribute to the asset classification and allocate resources Risk depends on exposure to macroeconomic events and can be measured as the...

...CapitalAssetPricingModel
The CapitalAssetPricingModel otherwise know as CAPM defines the relationship between risk and return for individual securities. William Sharpe published the capitalassetpricingmodel in 1964. CAPM extended Harry Markowitz's portfolio theory to introduce the notions of systematic and...

...calculation for debt. Nike’s total interest expense was $58.7 million, so their cost of debt was found to be 4.3%. Joanna used a tax rate of 38% in her calculations, making Nike’s cost of debt after tax to be 2.7%. Joanna decided to use the CAPM model in her calculation of Nike’s cost of equity. She used the risk-free rate of 5.74% on a 20-year Treasury bond, the geometric mean for market risk premium from 1929 to 1999 which was 5.9%, and Nike’s average beta from 1996 to...

...ADVANTAGES, AND DISADVANTAGES
THE CAPITALASSETPRICINGMODEL RELEVANT TO ACCA QUALIFICATION PAPER F9
Section F of the Study Guide for Paper F9 contains several references to the capitalassetpricingmodel (CAPM). This article is the last in a series of three, and looks at the theory, advantages, and disadvantages of the CAPM. The first article, published in the January 2008...

...The second element of total risk is related to macroeconomic events that affect the prices of all securities and are reflected in broad market movements (ibid). Under the perfect capital markets, the assumptions for the Mean-Variance approach can be concluded as the following three points: first is the single-period model. Second is the preferences of the investors are merely depend on the mean and variance of payoffs, which means at a given mean, lower variance is...

...military involved)
2. Low competition
3. High demand
* Weakness: 1. High capital required
2. Slow product process
* Opportunity: 1. Highly required in military
2. Increase goodwill of the company
* Threat: 1. Limited business area
2. High product quality required(high responsibility for products)
3. Legal issues
Weighted Average Cost of Capital Analysis (WACC):
In this case, we use WACC as the...

...CHAPTER 9
THE CAPITALASSETPRICINGMODEL
9.1 THE CAPITALASSETPRICINGMODEL
1. The CAPM and its Assumptions
The capitalassetpricingmodel (CAPM) is a set of predictions concerning equilibrium expected re¬turns on risky assets. Harry Markowitz laid down the foundation of modern portfolio man¬agement...

...Dividend Growth Model is that the dividend is expected to grow at a constant rate. That this growth rate will not change for the duration of the evaluated period. As a result, this may skew the resultant for companies that are experiencing rapid growth. The Dividend Growth Model is better suited for those stable companies that fit the model. Those that are growing quickly or that don't pay dividends do not fit the assumption parameters, and thus this...

...Risk & Capital, Unit 3 Individual Project
Financial Management - FINA310-1005B-01
Abstract
In this week’s individual project paper, a set of financial data will be analyzed (via provided XYZ downloaded information, Bloomberg.com, IP provided ‘assumptions’, and Web resources) in order to calculate expected returns and theoretical stock prices for XYZ Corporation. The CAPM (capitalassetpricingmodel) and CGM...