# Essay on CAPM Model

# Essay on CAPM Model

**Length:** 1835 words (5.2 double-spaced pages)

**Rating:** Strong Essays

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a) At the first occasion, I have to refer in two assets which have a high positive Correlation. In other words, if an upward (increasing) or downward (decreasing) movement in one asset tends to be accompanied by an upward or downward shift to the other asset as well. For instance, FTSE100 has a high positive Correlation with FTSE350. According to Levy, H. and Post, T. (2005) the correlation between these two indices is 0.95 (p.194). This occurs due to the fact that these two assets are from the same market sector. In addition, 100 of the 350 stocks are the same. Hence, if there is a significant rise or reduction at the price of bonds for FTSE100, the same shifts they will occur for FTSE350 bonds as well. Due to this fact, the correlation coefficient is definitely high.

b) On the other hand, when an upward or downward movement in one stock tends to be followed by a slightly upward or downward shift in other stock, is referred that they have positive low Correlation. For instance, Barclays and O2 are two companies which I personally believe that they have positive low Correlation. First of all, my opinion is based to the fact that Barclays is a bank company and O2 is a telecommunications company. Therefore, they are two companies which belong into two different market sectors, they are non-competitive companies. As a result, the coefficient correlation between these two businesses is low positive correlation. According to Levy, H. and Post, T. (2005) mean-variance theory is “evaluation of investment strategies based on the exp...

... middle of paper ...

...rstand. They try to follow an index –typically the FTSE All-Share or FTSE 100—which measures the performance of all or part of the stock market. If the market does well, the tracker does well. If it does badly the tracker does badly”. (p.386). In other words, it is a collective investment way to follow the performance of a specific index. In addition, the most important advantage of these funds is that are cheap due to the fact that they just do what the market does and the managers do not have to invest at any big bets to outperform them. Moreover, I personally believe that “Index Tracker Funds” are appropriate assets for those who believe that CAPM and its assumptions are correct.

d) Nowadays, is generally consider that CAPM model has some disadvantages and limitations, hence for investors it might be an unsatisfactory model.

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