Capital asset pricing model (CAPM) Essay Example | Topics and Well Written Essays - 1750 words

Capital asset pricing model (CAPM) - Essay Example In the following years, economists have critically reviewed the published theory of CAPM and its application in reality after comparing the actual returns with the expected returns. The CAPM model is still widely used by companies as an efficient model for computing cost of capital (Ko) on the basis of explanation that securities with higher betas offer higher return. CAPM has numerous applications; it is used in capital budgeting, for analysis of merger and acquisitions, valuation of convertible securities and warrant and to value the equity of a firm. William Sharpe made several assumptions for investors in creating market equilibrium in order to validate the CAPM model (Sharpe, 1964). The model develops the price of an asset which it must hold in order to satisfy the investors for holding the current market portfolio. According to CAPM, everybody bears the same risk in different quantity. As the systematic risks is removed and the investors hold diversified portfolios, they will have a need for return and according to the utility function, the investor will rank the portfolio. All the investors will tend to buy the market portfolio as everybody possesses the same portfolio comprising of risk bearing assets. Furthermore, by purchasing several other assets, it is possible for the investor to diversify a part of the risk. The riskiness of a security is not entirely based on the unpredictability of its return. If one investor puts all his money in a single asset, then variability would be a suitable measure.

Employment at Will and Due Process Assignment Example | Topics and Well Written Essays - 1500 words

Employment at Will and Due Process - Assignment Example The greatest intellectual strength is the inclusion of arguments made against their own point. If the authors had failed to include opposing arguments, their article would have been very one-sided and un-credible. It is important for readers to understand both sides of an argument before understanding which side is right or wrong (if there are, in fact, objectively right and wrong sides). This strength of the article, however, also proved to be somewhat of a weakness, because some of the opposing arguments were left unchallenged by the authors. One of the most interesting and perhaps most valid arguments made in this article is that the differences between private and public businesses are becoming less and less clear. Werhane and Radin put forth the notion that public businesses are businesses that cater to the public good before trying to make a profit whereas private businesses function for profit only. While this seems hard to define a business by for legal issues, I have heard that private businesses are marked by having 25 employees or less. I dislike these sort of bright-line policies where a difference of only 1 (say 26 employees instead of 25) makes a tremendous difference in applicable policy. The authors could have used this point to further argue their perspective, but since they did not I will now return to what they did say. Werhane and Radin backed their argument, that the line once drawn between private and public businesses is fading, by a case study involving General Motors (GM). The scenario explained in this article is that the private company GM was declared, by the Supreme Court, able to take over property to expand because it was for the "common good" even though, as a private company, its primary goal is profitability. On the authors' parts, this is a valid argument and it was good to utilize this case study as evidence of their point. (I would have liked more case studies to be used to give solid examples of their arguments.) While the case study does illustrate their point, it is actually not that simple, however. When this happened, it was likely the topic of much subjective debate, because many people may have disagreed with the Supreme Court's ruling. Furthermore, the actual intentions of the Supreme Court may not have been quite so innocent. Corruption is ugly, but it is widespread. Impor tant figures within the Supreme Court could have been easily influenced by a promise of shared wealth from GM. This just goes to show that while the Supreme Court's actions may have led the authors to believe that there is little difference between private and public businesses but really, the ruling of Supreme Court may have been swayed by external factors and its implications are thus inconclusive. Additionally, although Werhane and Radin tried to say that private businesses are like public businesses because they can be deemed as putting efforts towards achieving the common good, I believe it may more often be the other way around. Do public businesses actually put the common good before profitability Without profit, businesses cannot succeed. Perhaps, then, public businesses are similar to private businesses, because they do put profit first.