The table below depict the expected return CCC Berhad and XXX Berhad for April and May: a) Calculate the betas for both stocks. b) Discuss the problems encounters when testing the CAPM empirically. c) In light of the problems in CAPM, the APT model was proposed as an alternative. Discuss how the APT overcome the shortcoming of CAPM.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
The table below depict the expected return CCC Berhad and XXX Berhad for April
and May:
a) Calculate the betas for both stocks.
b) Discuss the problems encounters when testing the CAPM empirically.
c) In light of the problems in CAPM, the APT model was proposed as an alternative. Discuss how the APT overcome the shortcoming of CAPM.
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