Essay: Asset pricing model capital

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Currently, market analysts use the “Asset Pricing Model Capital” as the main instrument. However, given the distinctive characteristics of emerging markets, the analysis through this model can be inadequate and, therefore, be a factor that disrupts the proper functioning of the market: given that investor expectations are formed by observing the market with this model, equity prices the market cannot be the right reflection and performance risk they entail. This research aims to determine the validity, from the statistical point of view, the model assumptions concerning the standardization of the bezel surrounding the decision, oil market efficiency and assessments made by investors about different combinations of expected return and risk of their investments.
To fulfil this objective the following hypothesis is formulated: The model assumptions are not supported by the oil market in GCC, that is, the market is not informatively efficient and therefore the model is not linear, there are other factors affecting the income from shares, there is a positive relationship between risk and return.

Chapter Two: Literature Review

2.1 Model of Capital Asset Pricing (CAPM)

In the world of business it is very important to make good investment decisions. But often excellent ideas into projects and business plans which in practice are marred by a bad calculation of the net present value, mainly due to inadequate application of formulas in estimating the discount rate or cost of capital is observed that They leave out some basics. One of the most important tasks of the assessment and management of business investment is to estimate the opportunity cost of capital. In modern theory, decision making in uncertainty introduces a conceptual framework for estimating the risk and return of an asset that is part of a portfolio or briefcase and under conditions of market equilibrium. This framework is called the pricing model of capital assets or CAPM (Capital Asset Pricing Model). In this model the risk of an investment is divided into systematic risk or market risk (non-diversifiable) risk and unsystematic (diversifiable) or specific risk of a company.

The first type of risk is most important for the CAPM and is measured by its beta coefficient. This ratio relates the excess return of the action on the risk-free rate and the market excess return relative to the risk-free rate. The diversifiable risk or unsystematic risk arises from aspects such disputes, strikes, marketing programs with or without success and other events that are unique to a particular company. Since these events are essentially individual, their effects on an investment portfolio can be controlled and eliminated through diversification. The traditional way to get the beta coefficient is by means of a linear regression of two variables under the assumption that the excess return on investment, analyzed as a time series, has homoscedastic conditional variance.

The CAPM model and other models that measure the expected return and the risk of an asset, have been severely criticized by a number of authors, which are inadequate structure of these models to estimate and predict the price risk. Some of these criticisms are based on the long-term variance is assumed constant. Other criticisms are supported with regression tests, which show that predictions about the rate of risk premium measured by the variables used as explanatory are inefficient. There strongest criticisms questioning the logic of empirical models Harry Markowitz and William Sharpe, who proposed the CAPM Although the CAPM and other models, such as arbitrage pricing, which measure the risk of an asset have been severely criticized, this is still very useful in evaluating corporate investments.

In recent years, one can find another class of models belonging to the theory of time series. Such models are called autoregressive conditional heteroskedasticity models (ARCH, GARCH and ARCH-M) which try to overcome structural inefficiencies in the financial models. On the other hand, it is considered that the capital market is efficient only partially. There are three dimensions in measuring efficiency: operational, distributive and prices. There operational efficiency if all transactions can be made transparently at the lowest possible cost. Allocative efficiency if there is any financial asset of equal risk provides the same return. There are efficiency prices if all available information is reflected in prices. While there are three degrees of efficiency in prices: weak, semi-strong and strong. In the current weak level at least prices reflect all past information. In the semi-strong degree, in addition to the above, it should reflect all the information made available through the financial statements. In the strong degree, in addition to the above, it should reflect the private information; for example, plans for business growth.
This paper addresses three aspects. First, the theoretical framework for enterprise risk assessment which will help define private or financial evaluation of investments is presented. Second, the standard errors shown in the valuation. Third, disclosed some details of the empirical evidence on the Lima Stock Exchange to determine the discount rate from stock price. The effects of inflation and devaluation will not be considered.


2.2.1. The Asset Pricing Model – CAPM

The CAPM is a general equilibrium model is used to determine the relationship between profitability and risk of a portfolio investment or title when the capital market is in equilibrium. The model assumes, among other things, that all investors in the market determine the optimal portfolio using the approach of Harry Markowitz. The CAPM model has a simple approach, and is based on a series of assumptions on the capital market. Although the model assumptions do not necessarily meet in real life, the predictive ability of the model has proven effective. The pricing model of capital assets balance model or financial assets, better known as CAPM, for its name in English (Capital Asset Pricing Model), was developed by Sharpe (1964) and Litner (1965). Both based their studies on research conducted by Markowitz and Tobin (1960), who affi rmed that all investors select their portfolios through the mean-variance criterion.
The objective is quantified car model and interpret the relationship between risk and return because through this linear relationship can establish the balance of the financial markets. Like any economic model, the CAPM based its relevance more or less restrictive assumptions, which have enabled it to draw conclusions universally accepted.

According to Sharpe (1964), the basic assumptions on which is built the CAPM are:

a) It is a static model, that is, there is only one period in which the assets are traded or exchanged at the beginning of the period and consumption takes place at the end of it when the assets produce a payment or performance.

b) Investors acting in the market are individuals risk averse that maximize expected utility in one period, ie, the expected utility function is assumed biparametric, dependent solely on the expectation and variance of the random distributions probability yields financial assets at risk. Although this assumption may arise from the quadratic utility function, due to the significant drawbacks of this function to adequately represent a rational and risk adverse investor, it is considered the logical consequence of assuming that asset returns are normally distributed.

c) The expectations of investors about the expected returns, volatilities and covariance between assets are the same. In other words, investors are “price takers” featuring homogeneous expectations about return distributions of the different risk financial assets, allowing considering a unique set of investment opportunities for all investors, represented by the so-called efficient border. As in the previous case, that the only selection criteria used are the mean and variance of the distributions of asset returns and the related portfolios, it is necessary to assume normal distributions of returns.

d) The amounts of the different financial assets available risk you are fixed as an exogenous variable in the model, i.e. the supply of financial assets is given; besides, they are considered marketable, perfectly divisible and shall not dividends, but simply capital gains.

e) It is possible to invest in a risk-free asset with zero net supply and whose performance (RF) can be requested and granted unlimited resources.

f) The market is perfectly competitive, i.e., no investor is sufficiently important to influence business sufficient asset prices. In addition, there are no frictions in the market or transaction costs or capital tax.

g) The financial market is informationally efficient, which signifies that the market price action represents the consensus of the market about the value of the action. This means that prices reflect all available information on both the economy and the stock market as on the particular company.

The first three cases show us the way in which individuals choose their portfolios, the next two states that all decisions are taken at the same time and for the same period, while the latter respectively standardize the frame surrounding the decision, efficiency market and assessments made by investors about the various combinations of expected return and risk of their investments. These assumptions are based on factors that make up the CAPM (separation theorem, Capital Market Line and Line stock market) and which are explained below.

2.2.2. Assumptions of CAPM Model

CAPM assumptions described an extreme situation. The model is based on the capital market is perfect, and there are no restrictions that prevent the participation of investors.
This model is developed in a hypothetical world where the following assumptions about investors and the set of opportunities of an investment portfolio are made:

1. Investors are individuals who are risk averse and seek to maximize the expected utility of wealth at the end of the period. Investors weigh the portfolio taking into account the expected return and standard deviation of the various portfolios. Given two identical portfolios, lower standard deviation that will be chosen.
2. Investors are price takers and have homogeneous expectations about asset returns, which have a normal joint distribution.
3. There is a risk-free asset such that
Investors can borrow or lend unlimited risk free rate amounts. The risk-free rate is the same for all investors
4. The values are infinitely divisible. The amounts all assets are marketable and perfectly divisible. If an investor can acquire desired fraction of a share.
5. There is perfect information. Asset markets are frictionless; information has no cost and is available to all investors.
6. There are no market imperfections (such as taxes, laws, etc.). That is, taxes and transaction costs are irrelevant.
These cases show that CAPM is based on the tenets of microeconomic theory, where the consumer (the investor risk aversion) selected from indifference curves that provide the same utility between risk and performance.
2.2.3. This choice between risk and return
the investor takes on the one hand, to the formation of portfolios and the pursuit of portfolios that include, in addition to risky assets whose values is risk-free rate, and secondly to face a market for loanable funds must be in balance in every moment of time. Additionally, as any rational consumer, the risk adverse investor will seek to maximize the expected return on their assets and minimize risk. This behaviour of investors means that there is a unique set of portfolios that maximize expected return of an asset and minimize the risk; this series of portfolios are commonly referred efficient portfolios.
2.3. Separation theorem
Tobin (1958) integrates the term “risk-free asset” in the process of selecting investment when identifies the need for the investor to mitigate the uncertainty for future returns which the investor comes to a choice of safe investment. This selects specific proportion of their wealth to invest in the portfolio at risk (W1 W2 = 1) and the risk-free asset (W1); these proportions to invest reflected risk aversion.
In the original version of their investigation, Tobin (1958) considers as a risk-free asset yields and zero variance, so any portfolio formed by him and have as risky asset performance:
R= W2 (R2 +g) +W1 (0) 0 < W2 < 1; W2 =1– W1
Where g is a random variable representing the expectation of returns associated with each peso invested in the portfolio. The expectation of any shape equals zero. Therefore, considering these expectations have:
E(R)= R = W2 R

Chapter Three: Methodology
To check the relevance of the use of the CAPM in the GCC oil market, we first analyse proposed by Fama and MacBeth model, which is:

t = previous decision from t-1 to t.
= Represents the expected yield, expressed as a percentage of share i at time t; this variable is presented in the CAPM as
= Represents the intercept line with the capital market, in other words, represents the risk-free rate Rf (Cetes 28).
= It represents the risk premium, which is given by in the CAPM.
= It is the variable used to test the linearity, if the model is linear then
Si = It is the variable used to test whether there is another risk factor differently and it affect . Strictly speaking the CAPM assumes that
= Is the error in terms of the model, and this assumes that

However, one of the main assumptions that must be met when uses a multiple regression model is that mistakes should be independent,
That is to say: this is not consistent with the points made by Fama and MacBeth. To solve this problem Fama and MacBeth add variables to your initial model, leaving it as follows:

Where the subscript p is a portfolio consisting of several assets. For purposes of this test a portfolio with stocks that make up the sample of Prices and Quotations Index of the GCC oil market was formed.
Later we follow the model established by Black, Jensen and Scholes and Fame and MacBeth.
Used for calculating the CPI and prices of the shares of a portfolio comprised from historical data. The following regression was used to determine:

Where is the performance of the market portfolio (IPC) and the performance of our portfolio. The hypotheses to be tested were:

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