Outline and discuss the Capital Asset Pricing Model (CAPM) as means of Essay - 2

Outline and discuss the Capital Asset Pricing Model (CAPM) as means of valuing securities and their risk. What are the drawbacks - Essay Example The CAPM focuses on a single holding period and assumes the investors can borrow or lend at the risk free rate. There are no limits on short sales and all investors have homogenous estimates of return, risk, and variances. There are no taxes and transaction costs and all assets are highly liquid and marketable. The quantities of the assets are fixed and there is perfect market meaning investors cannot influence price and are price takers. The CAPM is based on the Capital Market line and the Security Market Line. The CML implies that all investors under the CAPM assumption must hold a combination of risk free securities and a market portfolio. If the market is in equilibrium the market portfolio will consist of every security in the same proportion as it is in the market. The CML specifies the relationship between an efficient market portfolio’s risk and return. CAPM focuses on individual securities as well and the SML defines the relationship between the risk and return of ind ividual securities which can be figured out by using the risk premium formula RPm = (km –krf) bm The required return on a specific stock according to CAPM would be the sum of the risk free rate and the product of the risk premium into beta. ... Beta is the relevant risk of an asset and is calculated as the gradient of the characteristic line which is the plotting of historical returns of an individual stock. Beta measures the volatility of returns compared to the volatility in the market. It is the measure of risk used in the SML whereas standard deviation is used as the market risk measure in CML. Although, CAPM has been used in security valuations its assumptions do not reflect a real market setting. As most investors in the real world do not hold fully diversified efficient portfolios, the beta would not be a sufficient measure of risk and SML would not be applicable for the required rates of return. As there are taxes and transaction costs in reality and assets have different degrees of liquidity this assumption does not hold true either. All investors do not have same forecasts of expected risk and return and they usually borrow according to their credit standing which is higher than the risk free rate. There is a disp arity in borrowing and lending rates which will distort the CML and thus the SML line. In many markets, large investors can influence price through buying and selling securities. Examples: Example 1: Krf= 6% Km=5% Beta for Kellogs foods is 1.2 Then the cost of equity would be = 6 + ( 6-5 ) 1.2 = 7.2 Example 2: The CAPM can be used to calculate the cost of common stock through the insertion of the risk free rate, expected market risk premium and the beta coefficient into the SML equation. For example: Krf= 8% Km=12% Beta for Kellogs foods is 1.2 Then the cost of equity would be = 8 + ( 12-8 ) 1.2 = 8 + 4.8 = 12.8 % The required return on Kellog’s stock would be 12.8%, 0.8% greater than the market return as its beta is greater than 1. However, due to

What is the Video Display Terminal Issue Assignment

What is the Video Display Terminal Issue - Assignment Example Many jobs today in the office field today are computer driven. A minimum of eight hours in front of a computer can damage or affect workers negatively. When a worker goes home uses cell phones, home computers, or PDA’s, the number of hours spent in front of a VDT will be in excess of eight hours a day. This amount of time in front of a VDT will not only affect workers negatively but decrease worker productivity as well. VDT affects range from mild to severe. Most of VDT complaints are neck/shoulder pain, headaches, blurred vision, eyestrain, headaches, and other vision problems (Salibello and Nilsen 1995:679). All of these symptoms decrease worker productivity by making the worker ill. Neck/shoulder pains make a worker rub their neck and shoulders more. Workers tend to focus on their pain center instead of productivity. This symptom can also produce restless nights making workers come in tired and sluggish. Other health factors are not as obvious as the ones listed above. One health issue is dust particle attraction toward a VDT screen. Many people allergic to dust or other airborne allergens might suffer from red eyes, rash, or sinus problems. Cleaning the computer screen frequently can prevent allergens from affecting workers. There are discussions about radiation emitting from VDT. No tests have been conclusive about radiation from a VDT screen harming workers have been found. The concern is still present, however, especially in pregnant women. These health issues are not as common but can impact worker productivity as well. VDT’s themselves can be harmful, but placed incorrectly a VDT can cause even more damage. When placing a VDT in an office lighting consideration is vital. Different workers need different types of lighting.