Jul 13, 2017 Others

How can an individual investor use or think about CAPM?

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Capital Asset Pricing Model

INSTRUCTIONS:

Now that you have read about the CAPM, would you ever use it to make personal investment decisions?  How can an individual investor use or think about CAPM?   

Consider the following:   

WHAT IS THE MAIN MESSAGE OF THE CAPM? IT EVOLVES FROM THE NOTION THAT INVESTORS IN GENERAL AREN`T STUPID: THEY DIVERSIFY THEIR INVESTMENT FUNDS INTO A WELL DIVERSIFIED PORTFOLIO. MORE SPECIFICALLY - THE MAIN MESSAGE OF THE CAPM IS THAT THE RATE OF RETURN ONE SHOULD EXPECT TO EARN ON A PARTICULAR INVESTMENT IS ONLY RELATED TO THE SYSTEMATIC RISK OF THE SECURITY, NOT TO ITS TOTAL RISK. WHEN YOU PURCHASE A STOCK (BECAUSE YOU LIKE IT OR BECAUSE YOU GOT A `TIP`),     YOU`LL BE EXPOSED TO THE TOTAL RISK OF THIS STOCK, BUT THE MARKET THEORY IMPLIES THAT YOU`LL ONLY BE COMPENSATED FOR A SMALL PROPORTION OF THAT RISK. HENCE, IF YOU DO LIKE RISK YOU SHOULD INVEST IN A WELL DIVERSIFIED RISKY PORTFOLIO WITH MANY SECURITIES HAVING A HIGH BETA, RATHER IN AN INDIVIDUAL STOCK.  NOW GO BACK TO THE INITIAL QUESTION AND PRESENT YOUR THOUGHTS...

Do research on the Internet and show the reference for the information. Don`t forget to respond to a colleague`s posting also.

Professor’s Note: In addition to searching the Internet for text related to this threaded discussion, please watch the following video (click on the following link to access this video and further Part 2) and post your comments.    

http://www.youtube.com/watch?v=LWsEJYPSw0k CAPM Capital Asset Pricing Model in 4 Easy Steps - What is Capital Asset Pricing Model Explained  

Grading Criteria: Try to add information not previously discussed by others. Please, provide factual information (not merely opinions) backed up by details or examples. Your comments should be in your own words and include references. 

CONTENT:

Students Name: Institution: Instructors Name: Date: Capital Asset Pricing Model Forward-looking investors always know that elimination of risk is impossible regardless of the efforts to diversify their investments. As capitalists, the rate of return should compensate them for taking on t

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