Benefits of CAPM
There are several advantages of CAPM application that are highlighted in our CAPM essay homework help as follows:
- Easy to use: It is a simple calculation and it can be easily tested to reach a wide range of possible results.
- Diversified portfolio: There is an assumption that investors hold diversified portfolios like a market portfolio. This reduces specific or unsystematic risk.
- Systematic risk: It considers the beta or systematic risk that is not there in other return models including the DDM or dividend discount model. Market or systematic risk is an important consideration as it is unforeseen. This is the reason it cannot be mitigated entirely.
- Financial and business risk variability: Businesses investigate opportunities and in case the financing and business mix differ from the present business, then the other return calculations such as the WACC or the weighted average cost of capital may not be used. When CAPM is used along with other investments, it offers unparalleled data, which can eliminate or support an investment.
The Ke or the cost of capital is the rate of return that the shareholders expect. It is calculated using the formula
Cost of equity=Risk free rate+ risk premium*Beta
Ke or cost of equity is the rate of return the shareholders expect
The Risk-free rate is the rate of return for risk-free securities
The Risk premium is the return, in which equity investors demand a risk-free rate.
Beta is a measure of the stock price variability related to the overall stock market.
The terms are explained by our help for assignment on CAPM experts as follows:
- Risk-free rate: This is the minimum return rate that investors receive when they invest in risk-free security. Government bonds are examples of risk-free securities.
- Beta: Risk is classified as systematic as well as unsystematic risk. Unsystematic risk is diversified. The risk arises because of the internal factors that prevail in an organization.
- Risk premium: This is calculated through the formula= return-risk-free return rate. This return is expected by investors to be above the risk-free return rate for compensating the volatility when a person invests in a stock market.
The beta value changes with time. The value is not constant. Therefore, an expected return may differ. The return on the stock market is calculated as the sum of the average dividend yield and average capital gain.