The capital asset pricing model (part 1) – ACCA (AFM) lectures
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Hi sir, Firstly amazing lecture and thank you again for providing these for free of cost
I have a doubt regarding the last statement you made about the Shares being undervalued in case Alpha is positive,
so if we assume that CAPM works in practice and the average difference throughout the year is 0,
wouldn’t that mean purchasing shares having positive alpha would in order to balance up have a fall in price of such shares hence resulting in losses to investor due to fall in share price.
Because normally gains are made by capitalising on such fluctuations,
Or unless what you said was in theory and not in practice
The only understanding I can make of this is that the Investor purchases these shares when they are undervalued and sells them when the share price begins to reflect the actual value(Increase in the share price) hence a gain may arise in such a case
Sorry but I think you have made a mistake in your last comment. Since the market is giving 7,6% and the D plc is giving 8%, probably the share is overpriced, am I wrong ?
Sir, I’m a bit confused about how to interpret the Beta values.
As you mentioned, a Beta of 1 serves as a baseline. A security with a Beta of 1 indicates that it carries the same risk as the overall market. Consequently, the security will move up or down to the same extent as the market.
However, I’m puzzled about Beta values such as 0.80 and 1.50. Doesn’t a Beta of 0.80 mean that the security is 20% or 0.2 times less risky than the market as a whole? Yet, you seem to suggest that 0.80 means the security is 80% (please also tell that whether it would be 80% or .80%) or 0.80 times riskier than the market. How can a security be riskier than the market as a whole when its Beta is lower than the market baseline of 1?
The same confusion arises with a Beta of 1.50. Doesn’t it mean that the security is 50% or 0.50 times more risky than the market? However, you’re stating that it’s 150% riskier than the market. Shouldn’t only the incremental portion above the baseline indicate the increased risk?
Certainly! Here’s the revised message:
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Sir, I’m a bit confused about how to interpret the Beta values.
As you mentioned, a Beta of 1 serves as a baseline. A security with a Beta of 1 indicates that it carries the same risk as the overall market. Consequently, the security will move up or down to the same extent as the market.
However, I’m puzzled about Beta values such as 0.80 and 1.50. Doesn’t a Beta of 0.80 mean that the security is 20% or 0.2 times less risky than the market as a whole? Yet, you seem to suggest that 0.80 means the security is 80% (please also tell that whether it would be 80% or .80%) or 0.80 times riskier than the market. How can a security be riskier than the market as a whole when its Beta is lower than the market baseline of 1?
The same confusion arises with a Beta of 1.50. Doesn’t it mean that the security is 50% or 0.50 times more risky than the market? However, you’re stating that it’s 150% riskier than the market. Shouldn’t only the incremental portion above the baseline indicate the increased risk?
Sir I think I have made a mistake while interpreting.
I think while you were reading the Beta of .80, you were trying that the security is 80% or .8 as riskier as a market, and in case of 1.50 you mean that the security is 1.5 times or 150% as riskier as a market. Which indirectly also means that it’s 20% less riskier than the market and 50% more riskier than the market.
Hope you will endorse this response.
Yes – what you have written in this post is correct 馃檪