Capital asset pricing model capm
15 important questions on Capital asset pricing model capm
Diversifiable/ unique/ unsystematic risk
Considering adding security to diversified portfolio
it's assumed that investor is risk averse
Occuring problems when estimating beta of company
2. Influenced by changes in financial leverage
3. Can vary over time
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Solutions to problems when estimating beta
2. Incorporation of fluctuations
3. Use of industry betas
Cyclical nature of revenues
-perform poorly in contraction phase
-heavily impacted by overall economy
Higher beta values are associated with
Corporate discount rate
What do trading costs include
2. Bid ask spread, difference between selling price and buying price
3. Market impact costs, to compensate for risks. Transaction price can be lower if you need to take extra risks due to market impact costs.
Wider bid ask spread and higher trading costs for all parties
Spread should be positively related to ratio of informed/uniformed traders
- informed traders raise required return on equity, increases cost of capital
Generic strategies to lower trading costs, so lowering costs of capital
2. Disclose more information
Buying in more uninformed investors
Ongoing costs of maintaining public listing
Return on assets roa
Economic value added eva
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