The Capital Asset Pricing Model Examples 1 – 3
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hi Sir,
Could not find lectures prior to chapter 7. Please advise where can I find the lectures before chapter 7. many thanks.
I don’t know where you are looking,
The lectures are all linked from the main AFM page.
https://opentuition.com/acca/afm/acca-advanced-financial-management-afm-lectures/
In the notes I downloaded, the relevant chapter for this lecture is chapter 10. Do I have the correct notes? Thanks.
How is that variance of the market measured? Do they use the share price movements (i.e. if share prices move frantically we have high risk and if they are stable low risk), or do they incorporate other factors as well? Thanks!
You won’t be asked to calculate it in the exam, but it is calculated from movements in the Stock Exchange Index (which represents the average of all the shares).
Thanks John 馃檪 I think this is why I keep failing exams, I wonder about questions I shouldn’t 馃槢
You are welcome 馃檪
are the following statements correct:
1. asset betas will be same for all companies within a sector, irrespective of gearing.
2. equity betas will be different for companies within a sector – unless their gearing is the same, ie. same gearing will give same equity beta for 2 different companies within a sector.
in this lecture, the point being made is that equity beta is same within a sector.
can u pls elaborate
thank u
after thought: is asset beta the same as beta for systematic risk?
Your first two statements are correct (and my lecture certainly does not say that the equity beta is the same within a sector!).
The asset beta measure the systematic risk of the business. The equity beta is the systematic risk as increased due to the gearing.
the student in ur lecture asked whether the beta applied to the same sector…..thats y i asked.
Thank you a lot sir 馃檪
you lectures are of great help to me for self study and u cleared my concept of market risk and systematic risk which i was confused with … .
Regards,
Thank you 馃檪
I have got problem to watch lecture on line kindly assist
The lectures are working fine, and so it is impossible to assist without knowing what the problem is at your end.
You should go to the support page – the link is above.
Sir, I’ve got a little confused about the CAPM formula.
Can I derive from the part of the formula as follows:
(Rm – Rf) is actually arriving at the systematic risk in the stock exchange based on the assumption that all the unsystematic risk have been diversified away via from well diversified portfolio of investment in the market?
Tq
Not quite.
Rm – Rf is not measuring risk itself, it measures the extra return required for the level of risk in the stock exchange as a whole. The stock exchange as a whole is certainly well-diversified – that is not an assumptions.
Individual shares may be more risky the the stock exchange as a whole, or less risky than the stock exchange as a whole (the return on the stock exchange is the average of all of the shares). Beta measures the risk of individual shares relative to the stock exchange as a whole – shares that are more risky have a beta more than 1, and shares that are less risky ha a beta of less than 1.
Understood.
Thank you.
You are welcome 馃檪
Hi Mr Moffat,
Is the risk which we calculated using the standard deviation in the previous lectures, is it systematic risk based on the assumption of diversified portfolio? Or it is the total risk, also used in calculation of systematic & unsystematic risk (? total2 = ?systematic2 + ?unsystematic2)?
My apologies the formula above is not so clear.
Thanks
Soud Said.
Hi we calaculted Beta to be 2.64 in this example. Why is is when you mention it you dont round it up but down is that the genereal rule? that Beta is 2 not 3? Many thanks
I do not think I ever said you don’t round up but round down! You must have misheard me.
We usually quote beta to two decimal places.
Where rounding is involved (anywhere in the exam) you round up or down to the nearest number. (If it is .5 then it doesn’t matter whether you go up or down 馃檪 )
Hello, I think I left this comment on the wrong topic! Not sure how that happened. But I was a bit confused in example 3, does standard deviation = market risk? thanks
Dear Admin! It is working now! Thank you very much!
Dear OT! I somehow do not hear the sound for that particular lecture! Could you please help me?
@nailya1908, maybe you have clicked ‘mute’ button on the video player controls?
Dear OT! You make my life easy! Thank you very very much!!! )))
I hope i’m corrrect when i add that they are thesame. Use of the two terms arises when comparing risk of one sector (e.g petroleum) against that of the market as a whole.
somebody please correct me if i am wrong.
@blackpaddy, See what I have written in answer to the question below.
what is the difference between systematic risk and market risk?
@yelen, same thing
@kateker,
Beta is systematic risk divided by market risk. In the example 2 systematic risk is 8%, market risk is 10%
So they are not the same..
@yelen, In this context, the systematic risk is the individual company’s risk, and the market risk refers to the whole companies’s risk in the stock exchange.
The difference is only about the amount but nature is the same.
@kateker, You are correct that the nature is the same, but be careful about the wording.
“Market risk” is the risk of the stock exchange as a whole (i.e. the average of the risks of all shares on the stock exchange).
The “systematic risk” of a particular share is that risk due to general economic factors (and risk due to factors peculiar to the company – “unsystematic risk” is ignored on the assumption shareholders have well-diversified portfolios.
(The risk of the market as a whole is only systematic because the market as a whole is perfectly well diversified).
Some shares have higher systematic risk than the market, and some have less. The risk of the market is the average of all of them.
thx
y cnt i see any of the videos
thanks to opentuition……. for providing to students a very very useful and helpful study stuff………!!!1
I always found this confusing but this surely simplified it for me. Thanks