The Relevance of the Capital Asset Pricing Model to a Company Seeking Essay

The Relevance of the Capital Asset determine Model to a Company Seeking to Evaluate its Cost of Capital - Essay ExampleThe Capital Asset Pricing Model was devised by William Sharpe to calculate as well as explain the expected rate of return key on an asset (that) can be written as the unhazardous rate of interest convinced(p) the assets normalized covariance with the market times the difference between markets expected the rate of return and the risk-free rate (Milne, 1995, pp. 5-6). Under financial theory CAPM is a model that shows assets returns concerning principle in conjunction with econometric models (Milne, 1995, pp. 5-6), and is stand for by the following formula (Burton, 1998, pp. 21-22)CAPM is calculated using the beta as it provides a cadence of a stocks volatility in terms of its movement comparison with the overall stock market (Burton, 1998, pp. 21-22). The supra means that when a companys share price moves in tandem with the market, with the beta of a stock is re presented by 1 and a 15% movement indicated as 1.5 (Burton, 1998, pp. 21-22). Foster (1986, p. 337) provides a summary of the two assumptions present in the Capital Asset Pricing Model as represented by 1. Two statistics, the mean and variance, are sufficient to describe investor takeences over the distribution of future returns on a portfolio. 2. Investors prefer higher expected returns to lower expected returns for a given level of portfolio variance, and prefer lower variance to higher variance of portfolio returns for a given level of expected returns.Corporate finance managers utilize CAPM to determine the estimated discount rate that is connected to a project under consideration (Ferran, 1999, p. 12). In conjunction with the foregoing, CAPM is used as a means to measure the systematic risk present in equity investment projects (Megginson, 1997, Pp. 107-123).