CORPORATE FINANCE Essay Example | Topics and Well Written Essays - 2000 words

CORPORATE FINANCE - Essay ExampleThe beauty of capital asset pricing model (CAPM) is that it not but helps the investors to calculate investment risk but also gives them a fair expected idea about the return on their investment (Fabozzi Frank, 1998). In the succeeding(a) paragraphs we will discuss the CAPM, its general theory, limitations and the reason of its adoption in the marketThe CAPM was initially presented and developed by John Lintner, William Sharpe and Jan Mossin autonomously (Bernstein, 1992). During the period of 1964-66, the idea of CAPM was presented by them in three different and exceedingly valued journals. CAPM was considered as a misleading model at its early stage because the business community thought that professed(prenominal) investment management was mainly a misuse of time. This misconception about CAPM remained dynamic for next ten years. After a decade, investment experts came to know the CAPM and recognized it as a significant mean to assess the expecte d risk in the investment.Capital asset pricing model (CAPM) is actually financial and economic cerebrate model which determines the rate of return of an asset in a well-diversified portfolio and thus subsequently determines its value. Capital asset pricing model (CAPM), determines the price of an asset in association with reward-to-risk ratio. Here2.Risk is the assets non-diversifiable risk (), also referred to as systematic risk, or market risk. The (beta) here is the measure of the risks involved in a limited stock or portfolio in relation to the overall market risk.A shares beta factor is the measures of measure of its volatility in harm of market risk. The beta factor of the market as a whole is 1.0. Market risk makes market returns volatile and the beta factor is simply a yardstick against which the risk of other investments can be measured. Risk or uncertainty describes a situation where there is not first one realistic outcome but array of potential returns. Risk is meas ured as the beta factor