Happy Learning!!
Beta of a security shows how the price of a security responds to market forces. The Capital Asset Pricing Model uses a beta to form a link between risk and return. CPAM provides a platform where investors are able to assess the effects of their investment in a security. The investors are able to calculate the impact that the investment has on the risk and return of their security portfolio.
CPAM reflects a positive mathematical relationship between risk and return of a security. The relationship is expresses in mathematical terms as given below:
The required return on investment = The returns, expected in a risk free investment (example: U.S treasury bills) +The securities beta risk * (The average return on all securities given by the stock indices - Risk free returns on risk free investment).
Therefore, the higher the beta of the security the higher will be the required return for a given security. Whenever a new security has been added into a portfolio, it impacts the overall performance of the investor's portfolio. Using the mathematical relationship given by the CAPM, the investor can ascertain whether the returns of the new security are matching up to the required returns for the security
Beta of a security shows how the price of a security responds to market forces. The Capital Asset Pricing Model uses a beta to form a link between risk and return. CPAM provides a platform where investors are able to assess the effects of their investment in a security. The investors are able to calculate the impact that the investment has on the risk and return of their security portfolio.
CPAM reflects a positive mathematical relationship between risk and return of a security. The relationship is expresses in mathematical terms as given below:
The required return on investment = The returns, expected in a risk free investment (example: U.S treasury bills) +The securities beta risk * (The average return on all securities given by the stock indices - Risk free returns on risk free investment).
Therefore, the higher the beta of the security the higher will be the required return for a given security. Whenever a new security has been added into a portfolio, it impacts the overall performance of the investor's portfolio. Using the mathematical relationship given by the CAPM, the investor can ascertain whether the returns of the new security are matching up to the required returns for the security
No comments:
Post a Comment