The Capital Asset Pricing Model (CAPM)
Introduction
In almost every economics textbook (Ben and Robert, 2001), economists
tend to argue: everything’s market price is determined by consumers’
demand and supply in the market, the intersection of which gives us
the long-term concept of ‘market equilibrium’. Although it sounds
straightforward, it is anything but easy in practice, especially when
the assets (like common stock) you are measuring associated with risk
and future uncertainties. Fortunately, economists and financial
analysts have developed plenty of theories to help us explain how the
risk for market assets can be appropriately measured in our life.
Capital Asset Pricing Model (‘CAPM’) is one of the most influential
and applicable models, which give good explanations and predictions of
‘market price for risk’. This essay is going to look at what the CAPM
really is, how it is derived and used, and will also see some
limitations of applying it in practice.
Assumptions
First of all, we have to make some assumptions here, as the CAPM is
developed in a hypothetical world, as written in the theory of
business finance (Archer and Ambrosio, 1970):
* Investors are risk-averse individuals who maximize the expected
utility of their end-period wealth.
* Investors are price takers and have homogeneous expectations about
asset returns that have a joint normal distribution.
* There exists a risk-free asset such that investors may borrow or
lend unlimited amounts at the risk free rate.
* The quantities of assets are fixed. Also, all assets are
marketable and perfectly divisible.
* Asset markets are frictionless and information is costless and
simultaneously available to all investors...
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Piketty’s Capital makes the case for a wealth tax on the capital and high labour incomes of the elite. He reasons on both economic and moral grounds as to the effectiveness of this measure to combat the “fatal flaw” of capitalism; its inherent tendency to concentrate wealth in the hands of an elite few. This recommendation comes after 577 pages of deep analytics performed on a dataset of wealth levels and wealth concentrations in France, the United Kingdom and the United States since 1820, 1855 and 1850, respectively. Piketty then derives a wealth-income ratio by dividing wealth at a certain time by corresponding national income to perform a like-for-like comparison across the regions. It pays to note that Piketty makes no distinction between wealth (the stock of one’s assets less liabilities) and capital, this difference is most often minute but can bring up difficulty when considering that capital is valued at its marginal product and wealth at the market
For several years, I have had an interest in virology and the spread and characteristics of various infectious diseases. Though it makes sense not to possibly induce a state of panic by informing individuals of illnesses that are not native to the area they live in and that they are not likely to contract, I have always liked to remain informed out of my own curiosity and interest. Thus, I have decided to write about malaria.
Malaria kills over 3000 children ever-single day 12. This statistic illustrates the tragic outcome that is associated with this devastating disease. In the United States, we fail to completely understand the gravity of Malaria because it is not relevant in our daily lives. The same cannot be said of other nations around the world that are still considered high-risk areas. Sub-Saharan Africa is widely known to bears the greatest mortality rate at the hands of this fatal infection 12. Despite constant efforts to fight malaria, several economic, social, and biological factors have hindered its eradication.
The chemistry aspects provided in the book was very detailed but there were some information lacking in the historical aspects of the book. The authors’ were also quick to conclude on how certain molecules were the sole factor responsible for the historical events. Although there are flaws in the book, this book is still an interesting read. The book is strongly recommended to the general public as it is able to provide to them a basic general understanding of chemistry and allows them to gain new knowledge and great insights into chemistry.
DDT has been proven to lower the number of malaria caused deaths. For example India’s malaria of 800 000 a year death rate was cut to zero by the late 1960s. In Sri Lanka DDT was reduced to 2.8 million cases a year to just 17. (Dyson, J) The US National Academy of Sciences in 1970 stated that DDT had prevented millions of deaths that would have been inevitable. Small amounts of DDT can affect small microorganisms. (Duke.edu) DDT microorganisms don’t usually die, they tend to keep the DDT in themselves this makes it bad for those predators who eat these organisms.
In summary, investors on the whole are rational and contribute to an efficient market through prudent investment decisions. Each investor?s optimal portfolio will be different depending on the feasible set of portfolios available for investment as well as the indifference curve for that particular investor. Lastly, risk free borrowing and lending changes the efficient set and gives the investor more opportunities to either get a higher expected return with the same amount of risk or the same amount of return with less risk.
Question 1: Taking the definitions within the RICS Red Book (2014) explain the difference between Market Value, Investment Worth and Fair Value? When might each be used?
According to Perold (2004), ‘CAPM can be served as a benchmark for understanding the capital market phenomena that cause asset prices and investor behavior to deviate from the prescript...
Early diagnosis and treatment of malaria reduces disease and prevents deaths. It also contributes to reducing malaria transmission.
Brealey, Richard A., Marcus, Alan J., Myers, Stewart C. 1999, Fundamentals of Corporate Finance, 2nd edn, Craig S. Beytien, USA.
The WHO reported that there was a seventeen percent of globally declining in malaria incidence between the year of 2000 and 2010, which was significantly lower than the proposed target of fifty percent rate (WHO, 2012). This statistical data reveals that many hurdles remain to overcome. However, an encouraging reduction of 33% in the malaria-specific mortality rate has observed in the African region. The RBM (Roll Back Malaria) initiative foresees the need for continuation of malaria control efforts until global malaria eradication can be obtainable in the long-term. However reaching the RBM goal will necessitate an increase in funding resources, a marked economic progress in countries with extreme poverty, and the maintenance or increase of the long-lasting insecticide-treated net coverage. (WHO,
One of the most dangerous diseases in the world is malaria; it is caused by mosquitoes which are infected. Those types of mosquitoes which cause malaria are referred to as Anopheles. It is true that according to research, the symptoms of an individual who is infected with malaria are seen after 10 days. This may happen because some of the parasites remain dormant even after entering the human body. As it is a threatening disease it needs to be controlled and this is done through the process of controlling the mosquitoes which cause it. There are several ways of controlling the spread of malaria, which involves the process of making sure that those mosquitoes are being regulated. In this case, indoor residual spraying will be put into focus.
... behave in an unpredictable manner. (Aumann, 2000, p.139 ) has pointed that “full rationality is not such a bad assumption; it is a sort of idealization, like the ideas of perfect gas or frictionless motion; . . . no less valid than any other scientific idealization”.
The parasitic organisms of the Plasmodium genus cause the life threatening disease known as Malaria. Malaria is a mosquito transmitted disease that has ravaged human kind for millennia. It is a disease that has once spread to every part of the world and even now is ubiquitous in certain regions. Malaria has managed to shape the natural selection of the human species and continues to affect the progression of many nations. It has hampered the economic and social growth of countries where it is found in such a profound way it has been stated that “Where malaria prospers most, human societies have prospered least”(Sachs, 2002).
The Modern portfolio theory {MPT}, "proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.