Disscuss the relevance of the capital asset pricing model (CAPM) to a Essay - 2

Disscuss the relevance of the capital asset pricing regulate (CAPM) to a company seeking to tax its cost of capital - Essay Example(Burton, 1998)The CAPM had its origin from the model of portfolio choice developed by desolate Markowitz. In the model, an investor is assumed to decide on the investment portfolio at time t-1 with an judge return at time t. Since the investors are assumed to be try averse, the data that they care about are the consider and the variance of their one period investment return. As a result, investors choose mean-variance-efficient portfolios, in the sense that the portfolios 1) besmirch the variance of portfolio return, given expected return, and 2) maximize expected return, given variance. Thus, the Markowitz approach is often called a mean-variance model (Eugene F. Fama).This figure gives a clear picture of the CAPM. Its horizontal axis shows the portfolio risk which is measure by the prototype deviation of portfolio return. Its vertical axis is th e expected return. The curve is the minimum variance frontier which traces the combination of expected return and variance at different levels of expected return (Eugene F. Fama). This shows the obvious trade-off between risk and expected return.At point T, the investor can have an intermediate expected return with lower volatility. If on that point is no risk free borrowing or lending, only portfolios above b along rudiment are mean-variance-efficient, since these portfolios also maximize expected return, given their return variances (Eugene F. Fama).EM applications. (2009). Capital Asset set Model (CAPM). Emapplications.com. Available from November 16,