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Assumptions of CAPM 1. 2. 3. 4. 5

The document presents a summary of the Capital Asset Pricing Model (CAPM). It introduces CAPM and describes its key aspects including the formula, assumptions, types of risk, and beta. Slides cover topics such as the relationship between risk and return, the CAPM formula, assumptions of CAPM, types of risks, and the meaning of beta in CAPM.

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PraTik JaIn
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36 views2 pages

Assumptions of CAPM 1. 2. 3. 4. 5

The document presents a summary of the Capital Asset Pricing Model (CAPM). It introduces CAPM and describes its key aspects including the formula, assumptions, types of risk, and beta. Slides cover topics such as the relationship between risk and return, the CAPM formula, assumptions of CAPM, types of risks, and the meaning of beta in CAPM.

Uploaded by

PraTik JaIn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Good morning one and all present over here, I am Pratik Jain, my roll

number is 22, I am going to present on topic Capital Asset Pricing


Model i.e. CAPM.
So these are the contents I have covered in my ppt.
3RD SLIDE
- A model described the relationship between risk and expected return and that is used in the
pricing of risky securities.
- The model was introduced by JACK TREYNOR, WILLIAM SHARPE, JOHN LINTNER & JAN
MOSSIN Independently, building on the earlier work of HARRY MARKOWITZ on
diversification and modern portfolio theory.
- The general idea behind Capital Asset Pricing Model (CAPM) is that investors need to be
compensated in two ways: TIME VALUE OF MONEY & RISK.
- FORMULA:
- The formula for calculating the expected return of an asset given its risk is as follows
- Ra =Rf + β (R m−R f )

5th SLIDE
Assumptions of CAPM
1. Investors all think in terms of a single holding period.
2. All investors have Identical expectations
3. Investors can borrow or lend unlimited amounts at the risk-free rate
4. All assets are perfectly divisible.
5. All investors are Price Takers, that is, investors buying and selling wont influence stock
prices.

6th SLIDE
Types of Risks:
1. Systematic Risk: Systematic risk is the probability of a loss which belongs to the
entire market.
2. Unsystematic Risk: whereas unsystematic risk belongs to specific industry or
segment.

7th SLIDE
About BETA

- Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in


comparison to the market as a whole.
- Beta is used in Capital Asset Pricing Model (CAPM)
- It also known as “Beta coefficient”
- A positive beta indicates the asset moves in the same direction as the market, whereas a
negative beta would indicate the opposite
- The beta of a risk-free asset is zero because the covariance of the risk-free asset and market
is zero.
- VALUE OF BETA
1. β=1 = Average systematic risk
2. β <1 = Less risk, low risk - low return
3. β >1 = high risk, high risk – high return
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- https://www.slideshare.net/zhanhui99991/fm11-ch-05show

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