Part 1 '' A Measurement of Risk 1.1 Risk 1.2 Capital Asset Pricing Model The estimation of systematic risk (or ‘beta’) is central to the implementation of the capital asset pricing model (CAPM) for researchers and practitioners. Markowitz (1952) argued that investors should be concerned with holding efficient portfolios, that is, a portfolio offering the highest expected return for each level of risk. Sharpe (1964) and Lintner (1965) took Markowitz’s work one step further to develop the CAPM to explain the relationship between systematic risk and expected return in financial markets. The CAPM is denoted by the following equation: The CAPM is used to determine the expected return on any security (E(ri)), which is consistent with the notion that price (or expected return) of a security is derived by its market risk. Investors are only concerned with market risk as it is assumed that rational investors hold a portion of the market portfolio, that is, a well-diversified portfolio. Since systematic risk is the crucial determinant of an asset’ s expected return, we use beta as a way of measuring the level of systematic risk for different investments and is given by the following equation. Beta is calculated by dividing the covariance of the excess returns on the stock and excess returns on the market, divided by the variance of excess returns on the market. Excess returns are returns above or below the risk-free rate. According to the methodology of Frino et al (2006) (all formulae are provided under appendix 1.1), the first step in calculating the beta of a security is to collect historical data and calculate a sequence of excess returns on a stock and excess returns on a market. This is illustrated in appendix 1.1 using weekly stock-price data for Rio Tinto, the All Ordinaries Accumulation Index and 10-yr bond yields. Because bond yields are expressed on an annual basis they must be converted to a weekly rate or return (by simply dividing by 52)....

...commonly known as CAPM defines the relationship between risk and the return for individual securities. CAPM was first published by William Sharpe in 1964. CAPM extended “Harry Markowitz’s portfolio theory” to include the notions of specific and systematic risk. CAPM is a very useful tool that has enabled financial analysts or the independent investors to evaluate the risk of a specific investment...

...European Journal of Social Sciences – Volume 21, Number 2 (2011)
From Regular-BetaCAPM to Downside-BetaCAPM
Qaiser Abbas
Corresponding Author, Professor Department of Management Sciences COMSATS Institute of
Information Technology Chak Shahzad, Park Road, Islamabad
E-mail: qaisar@comsats.edu.pk
Usman Ayub
Assistant Professor and PhD Scholar COMSATS Institute of Information Technology
Chak Shahzad, Park Road, Islamabad...

...CAPMCAPM provides a framework for measuring the systematic risk of an individual security and relate it to the systematic risk of a well-diversified portfolio. The risk of individual securities is measured by β (beta). Thus, the equation for security market line (SML) is:
E(Rj) = Rf + [E(Rm) – Rf] βj
(Equation 1)
Where E(Rj) is the expected return on security j, Rf the risk-free rate...

...pricing model (CAPM)
Using the Capital Asset Pricing Model, we need to keep three things in mind. 1 there is a basic reward for waiting, the risk free rate. 2 the greater the risk, the greater the expected reward. 3 there is a consisted trade off between risk and reward.
In finance, It is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already...

...Is CAPMBeta Dead or Alive? Depends on How you Measure It
Jiri Novak*
* Uppsala University, Sweden E-mail: jiri.novak@fek.uu.se October 2007 Abstract: The CAPMbeta is arguably the most common risk factor used in estimating expected stock returns. Despite of its popularity several past studies documented weak (if any) association between CAPMbeta and realized stock returns, which led several...

...true beta coefficient; then we use the findings to estimate and plot the Security Market Line (SML). In doing so, we have two purpose to fulfill. First, demonstrating the fact that the total variance of a portfolio approaches the systematic variance as diversification increases, which means diversifying across industries offer benefit over diversifying within a given industry. Second, using the figures estimated to testify that the CAPM works in practice.
The...

...CHAPTER 10
Return and Risk: The Capital Asset Pricing Model (CAPM)
Multiple Choice Questions
I.
DEFINITIONS
PORTFOLIOS
a
1. A portfolio is:
a. a group of assets, such as stocks and bonds, held as a collective unit by an investor.
b. the expected return on a risky asset.
c. the expected return on a collection of risky assets.
d. the variance of returns for a risky asset.
e. the standard deviation of returns for a collection of risky assets....

...Model (CAPM):
What Is It? How Does It Work? And Does It Work Effectively?
In 1960, a doctoral candidate in economics at the University of California, Los Angeles by the name of William F. Sharpe needed a dissertation topic. After reading a 1952 paper on portfolio theory by Harry Markowitz entitled Portfolio Selection, Sharpe had found his idea. Markowitz's paper presented the notion of an "efficient frontier" of optimal investment that advocated a diversified portfolio...

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