The Capital Asset Pricing Model (CAPM) isn't wrong. It just doesn't go Essay - 1

The Capital Asset price Model (CAPM) isnt wrong. It just doesnt go far enough. Discuss - Essay Exampleby the quntity bet () in the finncil industry, s well s the expect wages of the mrket nd the expected return of theoreticl risk- drop sset.The cpitl sset pricing model (CPM) possible action ssumes tht n investor expects yield on certin security equivlent to the risk free rte (sy tht rte chievble on six-month Tresury bills) plus agio bsed on mrket vribility of return X mrket risk premium. In winter 1991, the mrket risk premium on listed U.S. common stocks ppers to hve been bout 6.5%, ccording to sttistics published in the Qurterly Review, wintertime 1991, by the Federl Reserve Bnk of New York (though the Ibbotson study found it to exceed 8% from the mid(prenominal) 1920s through 1987). Thus in period of 4% infltion, the T-bill rte magnate be ppropritely 4.5 to 5% four- or five-yer Tresury note should hve yield of 5.5 to 6% Tresury bonds should yield percent higher(prenom inal) thn this nd corporte bond yields should hve even higher returns to compenste for their dditionl credit or business risk.The cpitl sset pricing model for this scenrio suggests tht nnul returns on low-bet electric utility might be .05 + .50 bet (.065) = 8.25%. bout 75% of this might come from dividends nd the blnce from expected growth in dividends over n extensive time period. By contrst, n verge stock with bet of 1.00 should provide rte of return of 4.5 to 5.0% plus the mrket premium of 6.5% or between 11 nd 12%. high-bet stock (one operting in cyclicl industry, for exmple) with bet, or reltive mrket voltility in price, of 1.50 should provide mrket return of 5.0% + 1.50 (0.065) or bout 15%. We could convert these from ernings price rtios to price-ernings (P-E) rtios nd determine tht the electric utilities, in this scenrio, should trde t bout 12 P-E rtio nd the high-bet