The CAPM is a valid pricing model and can be trusted to explain the expected return on a security . Discuss

 The CAPM is a valid pricing model and can be trusted to explain the expected return on a security . Discuss



How the question should be tackled:



1. Explain what the CAPM is When is it useful to use it?



2. What each variable of the equation is Ei Rf + (Em Rf)βi



3. Explain in more depth the beta factor



4. Weaknesses and limitations of the CAPM

Should at least contain the following:

assumptions on what the CAPM is based Are they all realistic?

Problem due to the fact that the beta factor is based on past data



5. Conclusion (not too long, max. 200 words)

No restrictions on the number of references but should at least contain 6 to 10 of these



Reading list: Lecture 9 12: The capital asset pricing model (CAPM)



Book

Archer, Stephen Hunt, (1982) The theory of business finance: a book of readings, 3rd ed, MacmillanCollier Macmillan

Notes: Various editions held in Library. Reading 42 (1st edition), or Readings 13 and 15

(2nd edition), or Readings 7 and 8 (3rd edition)



Book Core text

Arnold, Glen, (2002) Corporate financial management, 2nd ed, Prentice Hall / Financial Times

Notes: Please read Chapter 8



Book

Boys, P, The capital asset pricing model underlying theory in Institute of Chartered Accountants in England and Wales, Accountancy: the journal of the Institute of Chartered Accountants in England and Wales, Institute of Chartered Accountants in England and Wales pages 140-146



Journal

Morelli, D (2003) Capital asset pricing model on UK securities using ARCH in Applied financial economics 13, 3, pages 212-213

Notes: Refer to section II Equations 1-5, pages 212 213 only.



Legacy Journal

Morelli, D (2007) Beta, size, book-to-market value and returns: A study based on UK data in Journal of Multinational Financial Management 17, 3/July, pages 257-272



Book Core text

Brealey, Richard A, (1996) Principles of corporate finance, 5th ed, McGraw-Hill

Notes: Please read Chapters 8 and 9.



Book

Bromwich, Michael, (1979) The economics of capital budgeting, Pitman

Notes: Please read Chapter 15



Book

Firth, M, (1986) Issues in finance; edited by M Firth and S M Keane, Allan

Notes: Please read Chapter 3



Journal

London Business School. Institute of Finance and Accounting, Risk measurement service



Book Core text

Rutterford, Janette, (1993) Introduction to Stock Exchange investment, 2nd ed, Macmillan

Notes: Please read Chapter 9



Core text

Samuels, J. M (John Malcolm) 1938, (1995) Management of company finance, 6th ed, Chapman and Hall

Notes: Please read Chapter 10



Book

Sharpe, William F, ([1970) Portfolio theory and capital markets, McGraw-Hill

Notes: Please read Chapters 5 7, 9 and 10