Similarities And Differences Between The Single Index Model And Capital Asset Pricing Model

Outline the similarities and differences between the Single Index Model (SIM) and the Capital Asset Pricing Model (CAPM). Justify which of the two models makes a better assessment of return of a security (25 marks). To reduce a firm’s specific risk or residual risk a portfolio should have negative covariance or rather it should have no variance at all, for large portfolios however calculating variance requires greater and sophisticated computing power. As such, Index models greatly decrease the computations needed to calculate the optimum portfolio. The use of such Index models also eliminates illogical or rather absurd results.

Conservatism magnifies lower revenue and this is not just considered as a practical reason for the undesirable conservatism, it generates disorders in the process of recognizing revenue. Lafound and Watts, “states that conservatism is a conflict of interest among investors and creditors and they prefer to use less conservative approaches”. However, IASB and FASB conclude that conservatism should be excluded from the qualitative characteristics of accounting information (Chi 2008). Nevertheless, if these demands are carried out, this exclusion can change the development of future accounting standards. If the FASB was successful in eliminating conservatism, then it would increase information asymmetry between investors, not reduce it.

Value investing is a fundamental analysis approach formulated by Graham and Dodd (1934) that focuses on companies whose share prices do not reflect their intrinsic worth. A value investor buys a stock if its price is low relative to some fundamental benchmarks such as earnings, cash, dividends, or book value (Bartov and Kim, 2004), and expects that the market will properly recognize the company’s value and adjust the stock price accordingly. Typically, value stocks have attributes such as low ratios of price-to-earnings (P/E) and price-to-cash flow (P/C), high book-to-market equity (B/M) or high dividend yields (Lakonishok et al., 1994; Fama and French, 1998). Growth investing, on the other hand, focuses on companies that feature signs of above-average

The assumption of the project cash flows are reinvested at IRR are not included. This makes MIRR has better signal of a project’s true profitability. Once there is conflict between IRR and NPV, MIRR method can be used. Project with higher MIRR should be preferred. G. (2)

Supporters said that, fair value are usually claim for the facts of the market price or estimate price on current situation and sometimes they have admit there will be no active market or no market at all, thus no real price. Moreover, fair value accounting also means as which lowers its value in the market and at the same time it decline the quality of a company’s own debt. Fair value accounting is an additional momentum to a destructive downside overshoot. From the FASB framework concludes that, “Fair value reflects losses that have been incurred, it does not cause losses.” In a downward cycle, this appears untrue.

The focus of this theory is the strict order in which financing is favored. External financing is never preferred above internal financing. The pecking order theory states that external financing is too expensive, because outside investors possess less information than insiders and therefore involve more costs than necessary. Practically speaking this could imply that equity investors pay too little for a share, and that debt investors have interest rates set too high. Retained earnings are the preferred method of financing according to the pecking order theory.

A global common currency was first proposed by John Maynard Keynes, in which a single currency could bring new strengths and opportunities arising from the integration and scale of a global economy, making a single market more efficient. With a new common currency, the extra costs, risks, and a lack of transparency in cross border transactions, are eliminated. This hence makes doing international business more cost-effective and less risky, and even help to encourage foreign direct investment (FDI). Nations benefit this way, as a common currency would not suffer from inflation, allowing a provision of stable currency. Also, a singe common currency would cause a sort of levelling of the playing field, where countries can no longer devalue currencies to boost exports.

Accrual accounting is an accounting method that recognizes economic events regardless of when cash transactions occur in order to measure the performance and position of a company. The general idea is that economic events are matching revenues to expenses to recognize which is the matching principle at the time in which the transaction occurs rather than when payment is made (or received). This method allows combining the current cash inflows or outflows with future expected cash inflows or outflows to give a more accurate picture of a company 's current financial condition. Accrual accounting is considered to be the standard accounting practice for most companies with the exception of very small operations. This method provides a more

One cannot rule out investor psychology in causing this effect. This paper attempts to assess the relative importance of prospect theory and other explanations for the disposition effect. When one takes the purchase price as the reference price in the value function, then the implication of prospect theory is that the tendency to sell a stock should decline as the stock price moves away from the purchase price irrespective of the direction. The regressions are run for different holding periods, and they include a host of control variables, such as past returns. In contrast to the mean-reversion hypothesis, outperformance actually decreases selling for loss-making positions.

Rational expectations theory also leads to the conclusion that, although the government can help reduce the unemployment rate, their actions will only lead to higher prices. Since unemployment is basically at equilibrium most of the time, any actions by the government to alter its level will unnaturally disrupt the economy's price level. Therefore, the government should not