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Using The Capm Model To Estimate The Profitability Of A Financial Instrument Portfolio

Author

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  • Mădălina - Gabriela Anghel
  • Liliana (Dincă) Paschia

Abstract

The main objective of equity investors is the capitalized value of future benefits. In this regard, most of the time, these investors prefer to build portfolios of financial instruments. This requires the creation and permanent adaptation to the demands of the modern economy of models designed to ensure a much easier management of these portfolios of financial instruments. CAPM model provides a relatively accurate prediction of the relationship that exists between a financial risk and the expected return (yield). The usefulness of the model lies in the fact that, on the one hand it offers the possibility of comparison of different variants of placement in the financial markets and, on the other hand, justifies the estimate on the scientific basis of the expected future value of profits generated by a financial instrument. The core of the CAPM model is represented by the beta coefficient which measures the sensitivity of the financial instrument in relation to the systematic risk.

Suggested Citation

  • Mădălina - Gabriela Anghel & Liliana (Dincă) Paschia, 2013. "Using The Capm Model To Estimate The Profitability Of A Financial Instrument Portfolio," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 1-19.
    • Handle: RePEc:alu:journl:v:2:y:2013:i:15:p:19
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    References listed on IDEAS

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    1. Lily Fang & Joel Peress, 2009. "Media Coverage and the Cross‐section of Stock Returns," Journal of Finance, American Finance Association, vol. 64(5), pages 2023-2052, October.
    2. Ang, Andrew & Chen, Joseph, 2007. "CAPM over the long run: 1926-2001," Journal of Empirical Finance, Elsevier, vol. 14(1), pages 1-40, January.
    3. Grauer, Robert R. & Janmaat, Johannus A., 2009. "On the power of cross-sectional and multivariate tests of the CAPM," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 775-787, May.
    4. van Dijk, Mathijs A., 2011. "Is size dead? A review of the size effect in equity returns," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3263-3274.
    5. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    6. Eugene F. Fama & Kenneth R. French, 2006. "The Value Premium and the CAPM," Journal of Finance, American Finance Association, vol. 61(5), pages 2163-2185, October.
    7. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
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    More about this item

    Keywords

    CAPM model; the systematic risk; specific risk; beta volatility coefficient; anticipated profitability;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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