Paper about the CAPM (15 pages)
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Project Budget€30 - €250 EUR
The capital asset pricing model (CAPM) of William Sharpe (1964) and John Lintner (1965) marks the birth of asset pricing theory (resulting in a Nobel Prize for Sharpe in 1990). CAPM is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. Five decades later, the CAPM is still widely used in applications, such as estimating the cost of equity capital for firms and evaluating the performance of managed portfolios.
The attraction of the CAPM is its powerfully simple logic and intuitively pleasing predictions about how to measure risk and about the relation between expected return and risk. Unfortunately, perhaps because of its simplicity, the empirical record of the model is poor - poor enough to invalidate the way it is used in applications. The model's empirical problems may reflect true failings. (It is, after all, just a model.) But they may also be due to shortcomings of the empirical tests, most notably, poor proxies for the market portfolio of invested wealth, which plays a central role in the model's predictions.
In this project, I have to estimate my own CAPM using data from Datastream (available in the FS Library). The term paper should critically discuss the findings of this empirical application and address potential shortcomings revealed by the literature.
The paper should be in English. I only prepared the introduction so far.
It should be around 15 pages and the paper is due 5 December 2016.
Fama, Eugene F. and Kenneth R. French (2004): The Capital Asset Pricing Model: Theory and Evidence, Journal of Economic Perspectives 18(3): 25-46.
Lintner, John (1965): The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets, Review of Economics and Statistics 47(1): 13–37.
Sharpe, William F. (1964): Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance 19(3):425–42.
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