CAPM and the use of it Essay Example | Topics and Well Written Essays - 1500 words - 1

CAPM and the map of it - Essay ExampleCAPM is popular because of its simplicity and utility at various problems. CAPM is used to quantify the risk of exposure associated with the assets and so translate it into the returns associated with the securities (Mullins 2012).CAPM is actually used to make calculations of a single security. The formula is very transparent which is used in calculations. It includes the expected return on the capital assets, risk free rate of interest, marketplace risk which is denoted by beta, market premium and the risk premium. Now the description of all of these components is given as followHere beta or the market risk is very important. Every company too has its own beta value which is useful for every type of calculations. A specific companys beta value means the risk associated with the company but in comparison with the whole working(a) market. But when we talk about beta in capital asset pricing mould i.e. CAPM then it means the market risk whi ch any company must face during their cost and return calculations. By definition the value of beta is equal to 1.0.The application of CAPM gives its best results when all of the above assumptions are met in an appropriate environment. These assumptions are made regarding a generalized conditional environment. Whenever any specific different maculation may come and the investor may feel any difficulty then the researchers start their duty and kick downstairs any other way to solve the problem. Therefore we may see certain modified versions of theories and models. The rudimentary theme and assumptions of these theories and models is same only the operational side may be modified according to the situations. any(prenominal) critics are of the opinion that CAPM assumptions are totally unrealistic, but still there are many supporters of this model of capital asset pricing model.From the very beginning (i.e. just after introducing CAPM), the