An Introduction to an Analysis of the Capital Asset Pricing Model - CAPM Essay

DeNarius ThomasBusiness FinanceOctober 30, 2000Capital Asset Pricing ModelThe theory of the Capital Asset Pricing Model - CAPM is pretty basic. This theory though it seems very small is a very important part of the business world. The expected return on a long futures position depends on the Beta of that individual futures contract. If the Beta is greater than 0, the futures price should rise over time. If the Beta is equal to 0, the futures price should remain the same over time. If the Beta is less than 0, the futures price should decline over time. The Capital Asset Pricing Model - CAPM shows risk in a particular asset. With the Capital Asset Pricing Model - CAPM, traders can avoid much of the risk they receive because this broadens their chances. Therefore, only unavoidable risk should or will be compensated. Nevertheless, even after a trader expands his portfolio, some risk will remain. Because some risk is associated with the market as a whole, this risk cannot be countered through expanding. In other words, no matter how hard a trader tries to avoid risk, some risk will remain. This is just a fact of a matter and will not and cannot be changed.DeNarius ThomasBusiness FinanceOctober 30, 2000Beta CoefficientThe Beta measures the risk associated with one particular asset in relation to the overall market. Beta also measures how much a stock tends to change in price relative to the market as a whole, based on the last 60 months of market. Therefore, with a Beta of zero, the return should be zero. A Beta above zero should bring a positive return to a long position. And a Beta below zero should bring a negative return on a long position. For example, a beta coefficient of one would mean that the market and the given stock tend to move the same. So, a five percent move in the market should produce a five percent move in the...

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