The capital asset pricing model (part 1) - ACCA (AFM) lectures
YouTube video
49 Comments
A
Aditya·
Great lecture thank you Mr. John :)
J
John MoffatTutor·
Thank you for your comment :-)
F
Farhaan·
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
F
Farhaan·
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
M
mary·
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 ?
I
Inam·
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?
I
Inam·
Certainly! Here's the revised message:
---
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?
I
Inam·
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.
J
John MoffatTutor·
Yes - what you have written in this post is correct :-)
M
maidei·
so well explained, thank you so much Sir Moffat, appreciated.
Z
zabihullah·
Hello Mr Moffat
Can I pass AFM with your Lectures , open tuition notes and Kaplan Kit, and is there any major syllabus changes as open tuition lecture are from 4 years ago.
Thanks
J
John MoffatTutor·
Some of the lectures are certainly a few years old, but when there have been syllabus changes the lectures and notes have been amended accordingly. There is obviously no point in re-recording lectures on topics for which the syllabus has not been changed :-)
You can pass the exam using our lectures and notes, and a Revision/exam Kit. But in addition is is essential to read all of the technical articles on the ACCA website (and to ask in our Ask the Tutor Forum if you are unclear about anything in any of them.)
C
Cui·
Hello Sir, regarding on partA example 4. I am not very clear about the “under-valued” part. As my understanding, if the actual return is 8%, and theoretical return is 7.6%, then the risk is over stated, right? So is it correct that when actual return is higher than theoretical return, the market price of the share will be lower because the return given out to shareholder is larger when total earning is the same?
J
John MoffatTutor·
The market value is the present value of future dividends discounted at the required return. So if the actual return is higher than it should be, the market value will be lower than it should be.
M
Mr. Aboukar·
Hi, hope u are keeping well
when calculating Alpha values, we know the theoretical return but the question is how the actual return has been determined.
J
John MoffatTutor·
By looking to see what the return currently is using the current market value on the stock exchange.
M
Mr. Aboukar·
Thanks
J
John MoffatTutor·
You are welcome.
K
Kyle·
Hi John,
I hope this post finds you well in the current climate.
Just wanted to touch base on part b of example 3, as it does not appear to be covered in the lectures.
When calculating the overall return Matiss will receive, I would assume that we would use the overall beta for his investments of 1.26, but the answer in the notes appears to use the beta of 1.2 from Matiss' investment in A plc.
It would be great if you could explain why the beta of 1.2 should be used, if indeed it should.
Many thanks,
Kyle
P.s. My answer, using the overall weighted average beta of 1.26, matches the notes. I will assume the missing 6 is just an error in the answers section, unless you state otherwise.
J
John MoffatTutor·
It is a typing error - thank you for letting me know. I will have it corrected.
The final answer of 23.12% is correct.
N
njweng27·
Thanks very much Sir John, you are an amazing lecturer.
As a self study stay at home mom, you are making things very easy for me. I was scared at the beginning but so far, I'm actually understanding and enjoying. I actually lie in bed and reminisce your lectures. Hoping I pass on first attempt in June or Sept 2021 depending on my SBR results for March 2021.
Again thanks very much Sir, God bless you.
J
John MoffatTutor·
Thank you for your comment :-)
N
Noah·
Also sir just one more thing the Risk free rate of return i understand is basically the rate of return offered by G-Secs, but was curious to know if its exactly the 91days treasury bills rate?
N
Noah·
Sir don't you think the share is overvalued if its currently giving 8% return(perhaps due to speculation) as opposed to what should be giving i.e. 7.6%? So should not we be shorting the stock instead of going Long?
many thanks!
Y
YASH·
Hello John. Thanks for the great lectures.
Can you please explain again why the shares are undervalued
Thanks
yash
H
hardik·
Hi John,
Hope you are safe and well.
Can you please tell me how to prepare for theory? Theory as in for AFM and not particularly the above topic.
J
John MoffatTutor·
Listen to the lectures, read all the technical articles on the ACCA website, and most importantly practice all the questions in your Revision Kit and learn from the answers to the written parts (and for past exam questions check on the marking scheme which points were getting the marks).
A
Adeel·
Sorry i am asking this question here can i use revision kit of bpp of previous session.? Like june 2020. I dont think there are changes to the syllabus
V
Vicky·
Thank you so much for offering such a wonderful lecture and it really help me to taking P4 in Sep 2020 as the exam entry for Jun 2020 has to be cancelled due to covid-19. Thanks for inspire me to learn and that is a task that my lecturer dont possess even i spent SG 1,200 for the P4 course at the University, Thanks so much John.
J
John MoffatTutor·
Thank you very much for your comment :-)
H
Hurmill·
Hi sir,
I noticed in the practise kit the risk free rate is also referred to as the base rate.
Is there any other name it can be called?
Thank you.
J
John MoffatTutor·
The risk free rate is not normally referred to as the base rate. There may be occasions when a question refers to a base rate but whether or not this is the risk free rate depends on what is written in the question.
A
Adewoye·
Thanks for the lecture. please sir, what is the difference between asset beta and equity beta. And when using CAPM, are we to use asset beta or equity beta
J
John MoffatTutor·
I so explain this in the lectures that follow.
The asset beta measures the risk of the business of the company, whereas the equity beta measures the risk of the shares (which are more risky because of the gearing).
Which you use depends on what you are doing, and again this is all explained in the following lectures.
G
greenzstarr·
How do i derive equity or asset beta for the remaining business if the company is selling a part of the business. e.g if a company is in food and travel services and total equity beta is 1.5 but the ba of travel is .97. How do i get the equity beta for the remaining company. Please shed some light. Thanks
T
touseefalam1·
actually there is a whole topic missing in these lectures which is “impact of diversification in the calculation of beta factor and ultimately the calculation of WACC” and it has three cases. its very sad to say that this whole topic is not covered here, making this platform very unrelaible.
J
John MoffatTutor·
Nonsense.
The three cases you refer to were removed from the syllabus several years ago.
Everything relevant for the exam is covered in these lectures.
As regards the comment above yours to which you were replying, this is of course explained in these lectures
O
osuja·
my friend if you are not satisfied with the lecture go else and stop saying nonsense. i passed all the courses i have done using this platform , and Mr john has always be the best tutor .
This is very rude and unprofessional to comment in such manner . For your record many have used this platform and did better than those that went to kaplan or other relevant tuition providers i am a testimony ok my friend
i will advise you to desist from this attitude alright.
Thanks.
D
Denay·
When using the CAPM formula, when inserting the return from the market & the risk free rate, are we to use to whole numbers or percentages in the formula?
It tends to trip me up.
L
Lucie13Supporter·
Dear John
Great lecture great notes. I am actually going to retake in March and I found your updated notes are even better. (I used the older version previously). Hope it will be ok this time.
Thanks for your great work.
J
John MoffatTutor·
Thank you for your comment, and I hope all goes well for you in March.
B
bucheeri88·
Hello sir. I have a question relating to the Market premium. Is it possible in real life, that the market premium is negative (ie the market rate is lower than the risk free rate). In this case, what would be the reason for a negative market premium?
J
John MoffatTutor·
No - the market as a whole will always give a premium above the risk free rate :-)
I
iamm·
Thanks a lot. I'm happy you are P4 tutor. Your explanations are the best I've ever listen to. I hope I'll pass P4 in December.
J
John MoffatTutor·
Thank you very much for your comment :-)
A
ayush13·
Truly!!!
A
Ashlan·
I really struggled with CAPM at F9 (or FM), especially the "market premium", but the way Mr Mophat explains it here is 100% clear and understandable. Incredibly well demonstrated, thank you.
J
John MoffatTutor·
Thank you for your comment :-)
D
Danford·
Thanks Mr Moffat. You have made my life easier as I prepare for my last paper.I really did not understand what was going on with these gear/ungear stuff
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
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'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?
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.
Can I pass AFM with your Lectures , open tuition notes and Kaplan Kit, and is there any major syllabus changes as open tuition lecture are from 4 years ago.
Thanks
You can pass the exam using our lectures and notes, and a Revision/exam Kit. But in addition is is essential to read all of the technical articles on the ACCA website (and to ask in our Ask the Tutor Forum if you are unclear about anything in any of them.)
when calculating Alpha values, we know the theoretical return but the question is how the actual return has been determined.
I hope this post finds you well in the current climate.
Just wanted to touch base on part b of example 3, as it does not appear to be covered in the lectures.
When calculating the overall return Matiss will receive, I would assume that we would use the overall beta for his investments of 1.26, but the answer in the notes appears to use the beta of 1.2 from Matiss' investment in A plc.
It would be great if you could explain why the beta of 1.2 should be used, if indeed it should.
Many thanks,
Kyle
P.s. My answer, using the overall weighted average beta of 1.26, matches the notes. I will assume the missing 6 is just an error in the answers section, unless you state otherwise.
The final answer of 23.12% is correct.
As a self study stay at home mom, you are making things very easy for me. I was scared at the beginning but so far, I'm actually understanding and enjoying. I actually lie in bed and reminisce your lectures. Hoping I pass on first attempt in June or Sept 2021 depending on my SBR results for March 2021.
Again thanks very much Sir, God bless you.
many thanks!
Can you please explain again why the shares are undervalued
Thanks
yash
Hope you are safe and well.
Can you please tell me how to prepare for theory? Theory as in for AFM and not particularly the above topic.
I noticed in the practise kit the risk free rate is also referred to as the base rate.
Is there any other name it can be called?
Thank you.
The asset beta measures the risk of the business of the company, whereas the equity beta measures the risk of the shares (which are more risky because of the gearing).
Which you use depends on what you are doing, and again this is all explained in the following lectures.
The three cases you refer to were removed from the syllabus several years ago.
Everything relevant for the exam is covered in these lectures.
As regards the comment above yours to which you were replying, this is of course explained in these lectures
This is very rude and unprofessional to comment in such manner . For your record many have used this platform and did better than those that went to kaplan or other relevant tuition providers i am a testimony ok my friend
i will advise you to desist from this attitude alright.
Thanks.
It tends to trip me up.
Great lecture great notes. I am actually going to retake in March and I found your updated notes are even better. (I used the older version previously). Hope it will be ok this time.
Thanks for your great work.