Capital Asset Pricing Model Assumptions Research Articles

Practical Applications of Explanations for the Volatility Effect: An Overview Based on the CAPM Assumptions

“You are never going to get on the cover of Bloomberg Magazine unless you take big risks,” says Eric Falkenstein, a Quantitative Strategist at Pine River Capital Management in New York. And therein lies the quite rational, all-to-human reason why investors place big bets on high-volatility stocks: The misguided belief that they promise a big pay-off—and greater glory. In Explanations for the Volatility Effect: An Overview Based on the CAPM Assumptions, Falkenstein and his co-authors David Blitz, Head of Quantitative Equity Research at Robeco Asset Management, and Pim van Vliet, a Portfolio Manager for low-volatility strategies at Robeco examine the theoretical assumptions behind the capital asset pricing model (CAPM) and how violations of these assumptions in practice explain the volatility effect.

Empirical Validity of CAPM through Security Market Line and Non Linearity Tests: Indian Experience

Capital Asset Pricing Model (CAPM) is one of the important talk factors in finance and it has been widely discussed and tested in different capital markets throughout the world.This study examines the validity of capital asset pricing model in Indian Capital Market by using the data of 70 companies listed in BSE 100 index The study used Black, Jensen and Scholes (1972) methodology and Fama Macbeth methodology (1973) to test the empirical validity of the model. The results showed linear relationship between beta and return, and also it showed weakness in explaining the various assumptions of CAPM.

Explanations for the Volatility Effect: An Overview Based on the CAPM Assumptions

The Capital Asset Pricing Model (CAPM) predicts a positive relation between risk and return, but empirical studies find the actual relation to be flat, or even negative. This paper provides a broad overview of explanations for this ‘volatility effect’ that have been proposed in different streams of literature, and categorizes each explanation according to the CAPM assumption it relates to. Interestingly, various explanations relate to investor behavior that is rational given exogenous incentive structures or constraints, which may explain why the volatility effect has been so persistent over time. We argue that although the CAPM may be bad at explaining reality, addressing the reasons for its failure could actually be a normative arbitrage opportunity.

Corporate investment appraisal with possibilistic CAPM

The Capital Asset Pricing Model (CAPM) is a useful tool in the estimation of the equity cost in the cost of capital computation. This work proposes a method to limit problems arising from the CAPM assumptions. The main tools are the possibilistic mean and the possibilistic variance/covariance of fuzzy numbers as they are introduced by Carlsson and Fullér (2001) [3]. The results of this method are a possibilistic CAPM beta value and a possibilistic value for the market premium. These values lead to a possibilistic set-up of CAPM and then to the computation of the after tax Weighted Average Cost of Capital (WACC). The data for this work is fuzzy and derives from experts in investments and specialists in “deciphering” the information flowing from financial markets. Finally, a computational algorithm of five steps and a numerical example are presented for thorough comprehension of the proposed method.

Caveats Concerning Application of the Capital Asset Pricing Model in the Strategic Management Concept.

Researchers have begun to use the Capital Asset Pricing Model (CAPM) to guide inquiry in strategic management. However, examination of the CAPM assumptions, their implications, and empirical tests of the model show that it is inappropriate for studying most strategic management issues.

Divided Policy in Perspective: Can Theory Explain Behavior?

The contribution of recent research to the explanation of a variety of behavioral findings is examined, with particular attention to tax clientele effects, cross-section studies dependent on capital asset pricing model assumptions, and dividend signaling models. Further relaxation of standard capital market assumptions appears necessary to reconcile behavior with investor and firm rationality: for example, investors in capital-constrained firms may regard capital gains resulting from earnings retention as more risky than current dividends or stockholders may see dividend payment as imposing constraints on management that reduce agency costs. Copyright 1988 by MIT Press.

Portfolio theory, job choice and the equilibrium structure of expected wages

This paper presents some of the implications of modern portfolio theory for the equilibrium structure of wages under conditions of uncertainty. The primary model presented is a model of wage uncertainty and hence the equilibrium structure is derived in terms of expected wages. The equilibrium structure with the assumption of a perfect labor market (e.g., labor units are infinitely divisible and costlessly mobile) and a perfect capital market is shown to have a very simple linear form. The model assumes homogeneous labor units as well as the usual single-period capital asset pricing model assumptions.