But in actual world, the CAPM is not in conformity with the real world risk-return trends and empirical results have not always supported the Theory atleast in the short-run. The CML and SML are the lines reflecting the total risk and systematic risk elements in the portfolio analysis, respectively. It can thus be concluded that CAPM Theory is a neat Theoretical exposition. In actual results these zero beta returns are higher than the risk free return indicating that there are some non-Beta risk factors or some left over unsystematic risk.īesides, although, in the long-run, high Beta portfolios have provided larger returns than low-risk ones, in the short-run, CAPM Theory and the empirical evidence diverge strikingly and sometimes the relationship between risk and return may turn out to be negative which is contrary to CAPM Theory. Return = Risk free rate + Beta (Market Return – Risk free rate)Ī security with a zero Beta should give a risk free return. Capital Market Asset Pricing Model (CAPM) incorporates a relationship, explaining how assets should be priced in the capital market.Īs Betas differ according to the market proxy, that they are measured against, then in effect, CAPM, has not been and cannot be tested. The portfolio theory explains how rational investors should build efficient portfolio based on their risk-return preferences. The objective of investor is to minimise the risk for a given return and capital market theory deals with that subject.Ĭapital market theory is an extension of the portfolio theory of Markowitz. So the risks in a portfolio of assets will not be the total of individual risks of investments, made it can be more or less than the total. Two plus two will not make it four in the aggregation of risks, as shown by famous author Markowitz. In considering the portfolio, not only returns are to be considered as in the case of single investments but their risks also. In valuation of investments, one has to consider his assets in the portfolio as a part of his total investments.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |