The Dichotomous Asset Pricing Model Evidence from the UK market 1. Introduction Ever since its introduction by Sharpe-Lintner-Black, the Capital Asset Pricing Model (CAPM) has been subject to criticism, appraisal and continuous efforts for improvement, such as the Reward Beta approach (Bornholt, 2007), conditional CAPM or the consumption CAPM. The Dichotomous Asset Pricing Model (DAPM), introduced by Professor Liang Zou at the Universiteit van Amsterdam, brings a fresh approach to asset pricing and contributes significantly to enhancing the over-disputed CAPM. The model manages to combine mean-variance (MV) and the gain-loss (GL) approaches to portfolio selection and asset pricing by proving that a benchmark portfolio is MV and GL efficient if and only if a dichotomous asset pricing model holds. More precisely, the DAPM holds if for all assets i the following predictions are satisfied, in relation to a benchmark portfolio m: The model was so far tested and compared to the CAPM and best-beta CAPM (BCAPM) on the Fama-French 100 portfolios sorted on size and value, with significant insights. The aim of this paper is to repeat the analysis and test the predictive power of the DAPM for a European market, more precisely to answer the following question: Does DAPM hold for the UK stock market? UK market was chosen because of its size and trading volumes, but also because it bears most resemblances to the US one. This way, we are more prone to obtaining comparable results for the two markets. In particular, in order to answer the above question, the following hypotheses are tested: , for each individual stock i and

, for the cross section regression, where the benchmark portfolio is the market portfolio m. 2. Background and predictions The analysis performed by professor Zou on the Fama-French 100 portfolios sorted on size and value proves the superior predictive power of the DAPM, both over the BCAPM and the CAPM. The results can be summarized as follows: ,,i2,H1:...

...head: PRICINGMODELSPricingModels
Adam F. Thornton
FIN 501 – 3
TUI University
Dr. William Anderson
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...investors. Explain your reasoning
Undiversifiable (market )risk:
Market risk is the variability in all risky assets caused by macroeconomic variables. This risk cannot be avoided, regardless of the amount of diversification. Systematic risk (Market risk) factors are those macroeconomic variables that affect the valuation of all risky assets such as variability in the growth of the money supply, interest rate volatility, variability in...

...Capital AssetPricingModel
The Capital AssetPricingModel otherwise know as CAPM defines the relationship between risk and return for individual securities. William Sharpe published the capital assetpricingmodel in 1964. CAPM extended Harry Markowitz's portfolio theory to introduce the notions of systematic and specific risk. For his work on CAPM, Sharpe...

...Multifactor Models of Risk and Return. (QUESTIONS)
1. Both the capital assetpricingmodel and the arbitrage pricing theory rely on the proposition that a no-risk, no-wealth investment should earn, on average, no return. Explain why this should be the case, being sure to describe briefly the similarities and differences between CAPM and APT. Also, using either of these theories, explain how superior investment...

...Return on Asset "i" is 12%, the Risk-Free Rate is 4%, and the Beta (b) for Asset "i" is 1.2.
b. Find the Risk-Free Rate given that the Expected Rate of Return on Asset "j" is 9%, the Expected Return on the Market Portfolio is 10%, and the Beta (b) for Asset "j" is 0.8.
c. What do you think the Beta (β) of your portfolio would be if you owned half of all the stocks traded on the major exchanges? Explain.
3. In one page explain what...

...Capital AssetPricingModel (CAPM): Pros and Cons.
CAPM defines the relationship between risk and return. The premise of the model is that the expected investment return varies in direct proportion to its risk, i.e., the riskier the investment - the higher the return you should expect.
Shows:
• how much risk you are taking when investing in an instrument?
• whether the instrument is rightly priced
• whether you are getting...

...CAPITAL ASSETPRICINGMODEL
The Capital AssetPricingModel deals with independent investor problems that needs to undergo the procedure of selection of securities involving risks. The investors need to select the most advantageous security that produces the best possible outcome. This model deals with the estimation of securities as well as it links the risk and return (the expected shares)....

...Course Objectives The course aims to provide students with solid theoretical frameworks in assetpricing and other fields of finance. For assetpricing, the concepts of risk and return, and state prices will be introduced as a stepping stone towards the discussions of more advanced topics including the Capital AssetPricingModel (CAPM), the Arbitrage Pricing Theory (APT), and other...