Capm - Financial Management

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CIMA P9 SLFS Revision Notes May 2009
------------------------------------------------------------------------------------------------------------ ____________________________________________________________

____________
Sunil Bhandari – IAT Ltd
33
Chapter Six
CAPM
1 CAPM Equation
Minimum return = Rf+ (Rm-Rf)
There are several uses of the CAPM equation:-
To find the company’s Ke(Chapter 3)
Risk Adjusted WACC(Chapter 5)
Assist a stock market investor to buy or sell equities
2 CAPM & Buy/Sell Equities
2.1 Single Equity
Take/Find e
Put into CAPM
Minimum Return = Rf+(Rm-Rf) e
Forecast a return for the investment (could use
past returns)
Forecast exceeds/equals
minimum return-Buy or Keep the share
2.3 Combining Equities
a) Created a weighted average portfolio Beta
i.e (Cash in Share (1)/Total Cash in Equities X 1) + (Cash
in Share (2)/Total Cash in Equities X 2 )
CIMA P9 SLFS Revision Notes May 2009
------------------------------------------------------------------------------------------------------------ ____________________________________________________________

____________
Sunil Bhandari – IAT Ltd
34
b) Put into CAPM
Minimum Return = Rf+(Rm-Rf)Weighted Average
3 Meaning of a e
3.1 A e is the measure of risk being faced by equity
shareholders
3.2 e can be split into:-
Systematic Business Risk-measured by asset
Financial Risk
3.3 Sytematic risk is how market factors effect that
investment. Market factors are:-
Macroeconomic variables
Political factors
The measure is relative to the benchmark of the
market portfolio.
3.3 CAPM assumes that the investor eliminated the
unsystematic risk.
CIMA P9 SLFS Revision Notes May 2009
------------------------------------------------------------------------------------------------------------ ____________________________________________________________

____________
Sunil Bhandari – IAT Ltd
35
CIMA P9 SLFS Revision Notes May 2009...
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