Report on Capital Asset Pricing Model (CAPM)

“Financial Economics” Words: 1350

Table of Contents
1 Capital Asset Pricing Model.....................................................................................................3
2 Analysis of the Company’s Stock............................................................................................4
2.1 Overview of the company..................................................................................................4
2.2 Analysis of the SAIC Motor...............................................................................................4
3 Recommendation to the investor..............................................................................................6
References........................................................................................................................................7

1 Capital Asset Pricing Model
The capital asset pricing model is a common method which is used to analyse the return on a
portfolio of any company. It can be defined as the model which is used to identify the
relationship between systematic risk and expected return which is attached to the stocks of a
company. It is a common tool which is used by a number of investors for the purpose of
identification that is it feasible to invest in the stocks of a certain company or not (Zabarankin,
Pavlikov and Uryasev, 2014). The formula of the CAPM is,
E (Ri) = RF + βi (E (RM) − RF)
Equation 1: CAPM
Where RF= risk free rate
RM=Expected market return and
βi= beta of the investment
CAPM is useful as it covers two main aspects of the investment which is a great deal for the
investors. These aspects are time value of money and risk. The risk free rate in the CAPM
defines the impact of time value of money on the stock and identifies that how much earnings
will an investors be getting in the while period of the investment (Zabarankin et al, 2014). The
impact of risk is also involved in the CAPM which shows that how much amount will be
required by an investor for the compensation of additional risk. Beta is the model represents the
riskiness of the stock in comparison with the whole market. For the universal acceptance of the
CAPM, there are certain assumptions which are necessarily taken into consideration (Arnold,
2013).
 It is assumed that all investors want to maximize the economic earnings.
 They all are rational decision maker and are reluctant to the risks.
 They are price takers and they do not have ability to bargain.
 The market is frictionless.
 All the investors have homogeneous expectations