international banking capm.pptx

8/11/2019 International Banking CAPM.pptx

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Capital

AssetPricing

Model

Manuel Cervera 185184

Violetta

Prof. Dr. Kurt A. Hafner

International Banking


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The model was introduce by William Sharpe, John Litner

and Jan Mossin.

No matter how much we diversify our investments, it's

impossible to get rid of all the risk. As investors, we

deserve a rate of return that compensates us for taking on

risk.

The capital asset pricing model (CAPM) is used in finance

to determine a theoretically appropriate price of an asset

given that assets to non-diversifiable risk.


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The CAPM builds on the model of portfolio choice

developed by Harry Markowitz (1959).

The attraction of the CAPM is that it offers powerful and

intuitively pleasing predictions about how to measure risk

and the relation between expected return and risk.

This analysis implies to find securities with low

covariance (correlation) with the market.

Since investors will prefer securities with low covariance,

securities with low (high) covariance have a high (low)price and therefor a low (high) E(r).


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Is the only relevant measure of a stocks risk. It measures the part of the assets statistical variance that

cannot be diversified.

It is found by statistical analysis of individual, daily share

price returns, in comparison with the market's daily

returns over precisely the same period.

Positive beta or negative beta?


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Positive beta or negative beta? If the stock has a high positive :

It will have large price swings driven by the market.

It will increase the risk of the investors portfolio.

The investor will demand a high E(r) in compensation. If the stock has a negative :

It moves against the market.

It will decrease the risk of the market portfolio.

The investor will accept a lower E(r).


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For individual securities, we make use of the security

market line (SML) and its relation to expected return and

systematic risk (beta).

The SML enables us to calculate the reward-to-risk ratio

for any security in relation to that of the overall market.

Therefore, when the expected rate of return for any

security is deflated by its beta coefficient, the reward-to-

risk ratio for any individual security in the market is equal

to the market reward-to-risk ratio, thus:


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The market reward-to-risk ratio is effectively the market

risk premium and by rearranging the equation of last slice

and solving for E(Ri), we obtain the capital asset pricing

model (CAPM).


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CAPM's starting point is the risk-free rate - typically a 10-

year government bond yield.

To this is added a premium that equity investors demand

to compensate them for the extra risk they accept.

This equity market premium consists of the expected

return from the market as a whole less the risk-free rate ofreturn. The equity risk premium is multiplied by a

coefficient that Sharpe called "beta."


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All investors:

1. Aim to maximize economic utilities (Asset quantities are given andfixed).

2. Are rational and risk-averse.

3. Are broadly diversified across a range of investments.

4. Are price takers, i.e., they cannot influence prices.

5. Can lend and borrow unlimited amounts under the risk free rate ofinterest.

6. Trade without transaction or taxation costs.

7. Deal with securities that are all highly divisible into small parcels(All assets are perfectly divisible and liquid).

8. Have homogeneous expectations.

9. Assume all information is available at the same time to allinvestors.


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1. We will choose a stock and a market.

2. We will calculate Beta.

3. We will find the risk-free return that we will use.

4. We will find the Risk Premium.

5. We will calculate the CAPM, and we will compare our

results.


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The model does not adequately explain the variation in

returns of securities. Empirical studies show that assets

with low betas can offer the higher returns that the model

suggests.

The model assumes that all investors have access to thesame information, and agree on the risk and the expected

return for all assets.

The market portfolio consists of all assets in all markets,

where each asset is weighted by market capitalization.

This assumes that investors have no preference between

markets and assets, and picking only assets according to

their risk-return profile.


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RESOURCES

Books:

Systematic Guide to Write a Research paper. S.S. Bhakar and

Seema Mehta.

Papers:The Capital Asset Pricing Model: Theory and Evidence.

Eugene. F. Fama and Kenneth R. French. 2004. Journal of

Economic Perspective

An intertemporal Capital Asset Pricing Model. Robert C.

Merton. 1973. Econometrica, Vol. 41, No 5.

Website:

http://book.ivo-welch.info/ed3/chap09.pdf

http://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-

CAPM.pdf
http://book.ivo-welch.info/ed3/chap09.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-CAPM.pdfhttp://book.ivo-welch.info/ed3/chap09.pdfhttp://book.ivo-welch.info/ed3/chap09.pdfhttp://book.ivo-welch.info/ed3/chap09.pdfhttp://book.ivo-welch.info/ed3/chap09.pdf


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international banking capm.pptx

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