University Finance Report: Capital Asset Pricing Model Analysis

This report focuses on the Capital Asset Pricing Model (CAPM) and its application in financial management. It begins with an introduction to CAPM and its relevance in assessing the cost of capital and evaluating managed portfolios. The report then delves into the historical development of CAPM, highlighting its role in risk measurement and the relationship between expected return and risk. It discusses the model's use in pricing risk securities, its reliance on the beta coefficient, and its importance in calculating the cost of equity capital for business enterprises. The report also addresses the limitations of CAPM, such as its simplified assumptions. The conclusion emphasizes the value of CAPM as a tool for financial managers, suggesting that it can be used alongside other techniques to develop realistic cost of equity calculations. The report references several academic papers that support the analysis, and concludes that a good understanding of the factors that govern the use of the CAPM model is essential for financial managers.

Running head: FINANCIAL MANAGEMENT
Financial management
Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Introduction......................................................................................................................................2
Historical account of the development and application of Capital Asset Pricing Model in
managerial finance...........................................................................................................................2
Conclusion.......................................................................................................................................3
Reference List..................................................................................................................................4

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Introduction
This study deals with understanding the concept of Capital Asset Pricing Model and
purpose of CAPM model in executive business. In this particular assignment, proper emphasis
has been given on the theories of CAPM model and how it is helpful for the financial managers
(Zabarankin, Pavlikov and Uryasev 2014). The current segment explains about historical account
of the progress as well as purpose of Capital Asset Pricing Model in supervisory business in the
most appropriate way.
“Historical account of the development and application of Capital Asset Pricing Model in
managerial finance”
Capital Asset Pricing Model is one of the asset pricing theories that estimate the cost of
capital for business firm for the purpose of assessing the performance of managed portfolios.
This particular pricing model offers powerful as well as pleasing predictions on matters relating
to risk measurement and the relation between expected return and risk (Moosa 2013). The
empirical problems of CAPM model show theoretical failings those results to get simplified
assumptions. Capital Asset Pricing Model is used for describing the relationship between risk as
well as return in the most appropriate way. CAPM can be used for pricing of risk securities and
this model was introduced in the year 1964 as an extension of the Modern Portfolio Theory
(Barberis et al. 2015). In addition, the theories explore ways where investors need to construct
portfolios that have minimal risk levels for maximizing returns. This pricing model is used by
financial professionals for calculating the required return that is based on risk measurement. The

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model particularly relies upon risk multiplier that is known as beta coefficient (Berk and Van
Binsbergen 2016).
It is the responsibility of the business financial manager to calculate the cost of equity
capital of business enterprise. It is quite a difficult task to estimate the cost of equity and often
result is subjective by nature as well as open to question as a reliable benchmark. In addition,
Capital Asset Pricing Model is one of the tools that explain how financial markets price
securities as well as formative expected returns on capital investments. Furthermore, the model
give details about the method for quantifying risk as well as translating that risk into estimates of
expected return on equity (Dempsey 2013). By using CAPM model, it will be easy to understand
the nature of predictable cost of equity. This model cannot be used in separation as it explains in
detail about world of financial markets. CAPM is a tool that deals with risks as well as returns
especially on financial securities. In addition, the rate of return need to be ascertained by an
investor for receiving from buying a common stock as well as holding it for specific period of
time as it equals cash dividend received and adding up capital gains (Fama and French 2017).
Conclusion
At the end of the study, it is concluded that CAPM can be used by financial managers as
it supplement with other techniques as well as their own judgment for developing realistic and
useful cost of equity calculations. Capital Asset Pricing Model shows hypothetical illustration of
the performance of economic that need to be engaged for estimating cost of equity capital. The
above analysis puts emphasis on understanding all the factors that govern use of CAPM model
by financial managers in the most appropriate way.

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Reference List
Barberis, N., Greenwood, R., Jin, L. and Shleifer, A., 2015. X-CAPM: An extrapolative capital
asset pricing model. Journal of Financial Economics, 115(1), pp.1-24.
Berk, J.B. and Van Binsbergen, J.H., 2016. Assessing asset pricing models using revealed
preference. Journal of Financial Economics, 119(1), pp.1-23.
Dempsey, M., 2013. The capital asset pricing model (CAPM): the history of a failed
revolutionary idea in finance?. Abacus, 49(S1), pp.7-23.
Fama, E.F. and French, K.R., 2017. International tests of a five-factor asset pricing
model. Journal of Financial Economics, 123(3), pp.441-463.
Moosa, I.A., 2013. The capital asset pricing model (CAPM): the history of a failed revolutionary
idea in finance? Comments and extensions. Abacus, 49(S1), pp.62-68.
Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM) with
drawdown measure. European Journal of Operational Research, 234(2), pp.508-517.