Capital asset pricing model Essay Example | Topics and Well Written Essays - 1000 words

Capital asset pricing model - Essay Example The market indices of the securities market may not always diversify well. The capital-pricing model will not explain investors’ behavior and the beta might fail in capturing the risk of investment in real life practice due to these factors. Therefore, the model fails to act as a uniform and efficient valuation model in a real practical situation. The model only works in a generalized situation that is when dealing with a portfolio but fail if the investment is broken down into single forms of securities. The capital asset pricing model assumes that the higher the risks the higher the return and that all the investors are risk averse. The model assumes that securities are highly divisible into small parts. The model further, assumes that all investors access information at the same time and that investors make decisions based on a single period horizon. The capital asset pricing model is practically difficult to validate. Empirical validation of the capital asset pricing model has to establish that beta has ability to measure the risk of a security (Szyszka, 2009). It also has to show that there is a significant correlation between beta and the expected rate of return. The empirical results have however, being of mixed outcomes. The results have shown that the relationship is not as strong as the capital asset pricing model indicates. The results also have also shown that the expected returns are also related to other measures of risk, which includes firm’s specific risk. Other factors such as market value and book value ratios relationship with returns were found to be significant. In order to test capital asset pricing model empirically researchers need to use data on expected prices. However, the data available is historical information only. This therefore, will result to biased empirical results. The capital asset pricing model assumes that the market portfolio consists of all the assets in all the markets. The market portfolio according to t he capital asset pricing theory must include every marketable asset (Khalaf, 2010). The assumption behind the market portfolio is that market index performance is impacted by every factor in the economy. The use of proxy portfolio is very controversial and this leads to the questioning of the validity of the Capital asset pricing model. Capital asset pricing model measure of a security future risk (Beta) is constant. In a real security market, investors do not have future information about the market to estimate beta. Investors only have past information about the market portfolio, performance of different organizations and prices of shares. Therefore, investors can only estimate the measure of a security future risk using historical data. The use of a historical beta is only applicable in case the beta is stable over time. Research has shown that betas for different securities are not constant over time. Therefore, historical betas are poor indicators to determine future risk of se curities. B) Describe Roll’s critique of the early empirical tests of the Capital as

Research Methods-Planning and Evaluating Research based on a Essay

Research Methods-Planning and Evaluating Research based on a Questionnaire - Essay Example The effectiveness of the selection process relies on the amount of knowledge on the researchers’ hands concerning sampling (Cohen & Lea, 2004). The sample population should be enough to address the issue at hand and as a researcher, one should avoid biased sample sizes ensuring that the sample size is neither excessive nor small. Questionnaires can be administered and be distributed in a number of methods depending on the study’s scope. The different ways in which questionnaires can be distributed includes using postal services, telephone, electronic, and through personal administration or self-reports. All the methods used in the distribution of questionnaires as pointed out depend on the scope of the survey undertaken in terms of costs and time (Kalof & Dan et al., 2008). Administration of questionnaires to a sample in far locations is best distributed according through postal, telephone, and electronic mode. The three methods are effective in cost reduction while at the same time ensuring the researcher gets the input of respondents in far areas (Patton & Patton, 2002). However, the most effective form of distribution is through personally administered questionnaires or self-reports. This method involves the interviewer or researcher administering the questionnaires to the respondent physically. Th e physical presence of a researcher is important in the provision of guidance and clarification to respondent while at the same time ensuring they establish a rapport with their respondents (Patton & Patton, 2002). Self-reports and personally administered questionnaires yield high response rates in comparison to other modes of distribution and thus researchers should ensure they use it as a tool for research. Likert scales are important components of research especially when conducting a survey with the aid of questionnaires. The scale can be described as an ordered scale where respondents are availed with options to