First, Capital Market Line is line which is used for the rate of return that depends upon the risk free return rate and risk level for a particular portfolio. However, Security market line which is formed by CAPM is denoted as Characteristic line. It is graphical representation of risk and the return of market at given time. Second, in Capital Market Line, standard deviation is used for the risk measurement of a portfolio and in the Security market line, the beta coefficient is used to find out about factor of risk. Third, the graph of Capital market Line demonstrates about only efficient portfolios; while the graph of Security Market Line demonstrates both efficient and the non-efficient portfolios.
Investors agree on the expected rate of return and probability of these returns. Investors attempt to construct efficiency frontier portfolios. Market are I equilibrium and price are efficient. Investors plan for one identical holding period. Investors do not pay tax or transaction costs to trade.
According to Markowitz, when selecting the optimal portfolio an investor should focus on the two main elements portfolio return and portfolio risk, whereby risk is defined as fluctuations in returns. Each investor has different interests when choosing a portfolio, but every investor pursues the goal to achieve high returns at low risk: “It seemed obvious that investors are concerned with risk and return, and that these should be measured for the portfolio as a whole” (Markowitz, 1952). In the
Part 1 – Outline and explain what is meant by the term ‘a market economy’? Fully explain how such a market functions in theory and in practice. A market economy is a free market system. The decisions on production and consumption, resource allocation, and prices levels are all decided by a collective of self-interested individuals and organizations, rather than the government. Though the market is not entirely free, it is occasionally limited by government intervention.
The Capital Asset Pricing Model is for the most part utilized by money related organizations, and monetary security organizations, to see regardless of whether a speculator ought to go for broke, or if the stock he as of now possesses is underestimated or exaggerated, in different terms, when to offer and when not to offer stock, and regardless of whether to purchase it (or go out on a limb). The Theory is likewise used to gauge organizations costs as far as their value capital. Organizations likewise utilize it as an apparatus or technique for measuring an organizations money related markets value securities and along these lines decide expected profits for their capital. As a general synopsis to the majority of that The general thought behind CAPM is for speculators to be prize in two routes for their venture: time estimation of cash and hazard, this implies they get a reasonable measure of cash regarding the danger rate and the time estimation of the cash he contributed. At the point when connected the financial specialist is prize for the cash he/she contributed over a timeframe, furthermore the additional sum he/she as far as the danger.
Efficient market hypothesis requires that investors will be rational and have homogenous expectation. Although, efficient market hypothesis came into light after the seminal work of Fama in 1965, Louis Bachelier, a French mathematician, should be considered as the pioneer of the conceptual development of efficient
While investor is making their capital structure choices, market timing theory become the most importance theory to consider compare to the other two theories. This is due to the fact that the time-variation in the relative cost of equity has significant impact to the capital structure decision. Survey to investigate the time-series variation of financing decisions had been conducted to decide which theories is the best explanation of the time movements. Hence, it can be conclude that among these three theories, market timing theory is the best explanation for the co-movement of time as it indicate the fluctuations of debt and external equity while static tradeoff and pecking order theory do not provide sufficient evidence that can best describe the time-series variation. The reason that market timing theory put more emphasis on debt and external
3. Realism of the Market Theory Before learning about the theory of a perfectly competitive market, it is necessary for us to understand that to what extent the theory is real. Only a few small local markets close to the perfectly competition market theory but is not possible in a larger market. Examples includes local fish, wheat and other markets. But economists observed that some large industries and markets were described more accurately by the model of perfect competition than by any other type of market structure.
CHAPTER ONE INTRODUCTION Introduction Objectives of the Study Importance of the Study Limitations of the Study Hypothesis of the study Structure of the Study Introduction: The Modern Portfolio Theory (MPT) was introduced by harry Markowitz(1952), It was the beginning in portfolio-selection technique, and revolutionize portfolio development in order to emphasis the relationship between risk and return , Mean-Variance Optimization is at the core of Markowitz’s Modern Portfolio Theory . It is heavily based on the concept of the efficient frontier (EF), and process of finding the optimal portfolio and how to create a frontier of investment portfolios. The set of all portfolios which had the greatest possible expected
2. THEORETICAL FRAMEWORK Two traditional capital structure theories guide most academic literature concerning financing decisions; the pecking order theory and the (static) tradeoff theory. This section will elaborate on the implications of these theories in order to clarify that the market timing theory cannot be explained by one of these theories. The existing academic literature concerning market timing will also be discussed in this section. Tradeoff theory In a perfect market without taxes, costs of financial distress, agency costs and any other imperfections, the capital structure of a firm is irrelevant in terms of costs.