Expert answer:Discuss the different variables of CAPM. What are the benefits and limitations of the CAPM? How would you (as a manager) use it in decision making?In responding to your classmates’ posts, review your classmates’ analysis and compare the similarities and differences with your analysis. Why do you think your response was similar or different?You just need to give the responds to two students I posted and words within 100.
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Student One:
In the CAPM model, we need three input variables: risk free rate, market
return and beta. According to Investopedia.com, risk free rate represents
for time value of money which the investors can take the yield of
government bonds. People usually use the return of dominal market such
as S&P500 to be a variable in CAPM in the US market. The third one is
beta which represents for the volatility of asset and market.
The benefit of CAPM is easy-of-use which investors can find the input
data easily and apply in model then have the return of investment based
on its systematic risk. However, they also have drawback which reflect in
how to tale input data and assumption because the data is easy to change
and fluctuate in short time.
As the manager, I will use CAPM model as references based on its
relativity. Besides, I also refer other tools to find the discount rate return
for my portfolio.
Student two:
The capital asset pricing model (CAPM) is a model that exhibits the
connection between systematic risk and expected profit for assets,
especially stocks. the general thought behind CAPM is that financial
specialists should be remunerated in two ways: time value of money and
risk. The time value of money is used to identify the level of risk-free rate
in the formula and repays the financial specialists for putting cash in any
venture over a lap of time. The risk-free is usually the yield on
government bonds which is mostly treasuries. The capital asset pricing
model as numerous of advantages. Using CAPM is an easy tool. With the
simplicity of the calculation, there is no headache or stress to analyses of
a positive outcome to guarantees the expected rates of return. Add to that,
CAPM gives a diversified portfolio, due to the assumption that investors
hold to the market portfolio and help for business and financial risk by
analyzing all opportunities if there is a differentiation between financial
current business to the business mix then other will require return
calculation such as the (WACC) cannot be used. However, it possible
with CAPM.
As a manager, I will use CAPM to get to the goal of my company. Using
CAPM to solve the desired return will be effective. also, with the level of
sensitivity which is beta will help to measure the stock’s sensitivity of
return base of the type of market.
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