A Review On Asset Pricing Literature - 2139 Words

Introduction. This write – up is aimed at critically reviewing Campbell, J. and Vuolteenaho, T., 2004, Good beta, bad beta, American Economic Review and its contribution to asset pricing literature which proposes a simple and intuitive two – beta model that captures a stock’s risk in risk loading factor (BETA) and decomposing the market beta of a stock into cash – flow beta (bad beta) and discount – rate beta (good beta) . BAD BETA, GOOD BETA Owing to the failure of CAPM, some extensions of the model have been introduced which includes this article as an alternative to the familiar the CAPM. They introduced the idea of decomposing the market risk beta into two Good Beta, Bad Beta critically reviewing the American Economic . This paper they critically reviewed the failure of CAPM to â€Å"describe the average realized stock returns since the early 1690s using a value – weighted equity index as a proxy for the market portfolio†. (Campbell, J. and Vuolteenaho, T., 2004, p 1). It was observed that small stock and value stock have delivered higher average returns than their beta can justify, also bringing to light stocks with high past beta having had average returns not higher than stocks of the same size with low past beta, which tends to remain unexplained by CAPM. In accurately ascertaining risk faced by investors, the duo proposed that the Sharpe - Linter CAPM should be decomposed into two different beta: cash – flow beta (Bad Beta) and discount rate beta (Good Beta). TheyShow MoreRelatedThe Arbitrage Pricing Theory ( Apt )1084 Words   |  5 PagesI. Introduction Background Ever since Ross (1976) proposed the Arbitrage Pricing Theory (APT) as an alternative to the capital pricing model, many economists and investors have applied APT across different markets. Whereas the traditional capital pricing model explained asset returns with one beta, sensitivity to the market return, APT decomposes the return with a multiple number of factors. This idea became particularly popular for investors who aim to gain systematic risk other than market riskRead MoreThe Valuation Of Mutual Fund1461 Words   |  6 Pagesmodels have the purpose of assessing the expected returns of stocks and evaluating their performance related to the exposure to the market. The exploration for the risk-related asset pricing model that clarifies variations in stock returns is one of the most important issues in finance. Apparently, the capital asset pricing model (CAPM), which is proposed by Sharpe (1964) and Lintner (1965), and the Fama and French three factors model, which is proposed b y Fama and French (1992, 1993 and 1995), areRead MoreTheories Of Asset Pricing Behaviour801 Words   |  4 Pagesyear. Let me firstly clarify what is meant by anomalies in the market, Anomalies within the market are empirical results that are inconsistent with current theories of asset-pricing behaviour ( G.William Schwert). Anomalies represent inefficiency in the market ( i.e. Arbitrage opportunities) or issues with the underlying asset-pricing model. Scholars have documented many effects that have generated anomalies: Weekend Effect, January effect, Size Effect, momentum and contrarian effect. However onceRead MoreQuestions On Arbitrage Pricing Theory1493 Words   |  6 Pagessystematic factors with considerable ability to explain security returns.† Arbitrage Pricing Theory 1. Introduction †¢ Brief background on the subject from the literature Ever since Ross (1976) proposed the arbitrage pricing theory (APT) as an alternative to the capital pricing model, many economists and investors have applied APT across different markets. Whereas the traditional capital pricing model explained asset returns with one parameter beta, sensitivity to the market return, APT decompose theRead MoreA Chooser Option Or A Straddle : Valuation And Efficiency Analysis1423 Words   |  6 Pagesor feelings about the future movements of the market. Multiple strategies involving options exist today, but in the proposed study the attention will be paid to the strategies which presuppose the increase in the future volatility of the underlying asset such as straddle or strangle. The emphasis is made on this type of strategies since the volatility, which dramatically increased after the financial crisis of the end 2000-s, still has not reached the pre-crisis levels in the world’s largest economiesRead MoreRisk Management Is Not Avoiding Or Elimi nating Risk Essay1622 Words   |  7 Pagesthat experienced asset quality problems due to lack of effective credit review process. The purpose of credit review is to provide appropriate checks and balances to ensure that credits are made in accordance with bank policy and to provide an independent judgment of asset quality. Fourth, a common and very important problem in credit process is lack of monitoring client or collateral value. In absence of monitoring process the bank will fail to recognize early signs that asset quality will deteriorateRead MoreInflation and Currency Risk644 Words   |  3 PagesChapter 1: Research Overview 1.1 Background of the Study Inflation and currency risk is the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency. Inflation causes money to decrease in value at some rate, and does so whether the money is invested or not. Malaysia is part of the worldwide emerging market where the country aims to achieve the status of a developed country by the year 2020, however, the increase in inflation and currencyRead MoreNotes On The Value Of Diversification1352 Words   |  6 Pagesinvesting a basket of assets in portfolios. But what contributes to the success of portfolio diversification? A large number of assets? A variety types of asset allocation? Adding international investment? Numerous of risk factors? They are all indicators of a well-diversified portfolio. In this case, we will discuss about the advantages and disadvantages of diversification in portfolio management with related indicators. On one hand, some mention dynamic and numerous assets a llocation in the portfolioRead MoreBinomial Model : Black Scholes1630 Words   |  7 Pages Rajdeep Atwal December 2015 The University of Leicester CT8: Financial Mathematics Black Scholes and Binomial Model â€Æ' Contents Literature Review 3 Binomial model 3 Black Scholes 5 Justification 7 Binomial model 7 Black Scholes 11 Modified Exam Question 11 Binomial model 13 Black Scholes 16 Bibliography 16 Literature Review These models are very similar, they are based on similar theoretical foundations and have a series of assumptions, such as; Geometric Brownian Motion and risk-neutralRead MoreEssay on Risk and Return Analysis for Efficient Portfolio Selection 892 Words   |  4 PagesÃŽ ²eta, Standard deviation and Co-efficient of variation). 3.2 Theoretical objectives The main goal is to use quantitative measures of risk and return to a balance that suits an individual investor. The following topics will be addressed in my literature review: †¢ Risk Management and strategies for risk management. †¢ Risk premiums (major types of risk: financial, business, liquidity, currency, political, callability, and convertibility). †¢ Investment risk classifications, basis of investment and measurements