Some academics refute the usefulness of the capital asset priceing model stating that it has a number of empirical problems. critically evaluate this view - Essay Example There are several criticisms on the empirical effectiveness of the CAPM theory viz. the measurement of beta, estimation of market return, difficulties in accessing market portfolio return, reliance on beta as a risk measure, ex ante distribution and ex post population and other unrealistic assumptions underlying the Capital Asset Pricing Model. The model has seriously failed in terms of empirical tests and several studies refute its acceptability as the best asset pricing model. This paper sheds light on the empirical problems and criticisms of the Capital Asset Pricing Model. It evaluates the points put forward by several scholars and discusses the practical applicability of the model. The Capital Asset Pricing Model theory values an asset with respect to its risk (Soufian, 2001). This risk is measured with the help of beta with respect to the overall market risk. Despite its importance and practical usage, some academics point out several problems that are confronted in the empirical testing and application of the CAPM [Fama and French (2004), Michailidis (2006), Ryan (2006), (Soufian, 2001) etc]. Some of the major points of criticism arise out of the measurability of beta, accessibility of the market portfolios, relationship of beta with market returns and the unrealistic assumptions of the model. These criticisms pose several questions on the practical importance of the Capital Asset Pricing Model. The following paragraphs evaluate the various problems regarding the empirical validity of the CAPM. One of the most important factors underlying the Capital Asset Pricing Model is the measurement of beta which is the covariance between an asset’s return and the market return divided by market return’s variance. Hence, estimation of market portfolio return is an integral element of beta measurement. It is however not clear as to what classes of assets to specifically include or not in the portfolio of market
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12/23/2019 0 Comments Learning Team Peer Evaluation EssayTeam C members discussed the Implementation, Strategic Controls, Contingency Plans assignment and the feedback provided for each team member’s document. In the discussion, each team member had an opportunity to summarize the strengths and weaknesses of each paper. Members noted several areas for improvement and team members will use the suggestions to make revisions to individual paper. Areas for Improvement The most common section requiring additional work is the key success factors section. Budget, forecast financials, and break-even charts require additional clarification. Some papers thoroughly cover most of the requirements but miss one area. The second topic addressed is the lack of detail for functional tactics, milestones, tasks, and resource allocation. A couple of team members are experiencing trouble identifying specific measurable objectives for their implementation plan. According to Pearce and Robinson (2013), “Objectives must clearly and concretely state what will be achieved and when it will be achieved“ (p. 193 ). The third suggestion for improvement was to tie the risk management plan to the implementation plan. Some team members struggled with describing the change in risks with the implementation plan and management of the risks. Other minor suggestions for improvement include the grammar and APA formatting. Areas of Strength Each team member prepared a well organized first draft. The papers provide an excellent understanding of the member’s company and the implementation plans suggested. The drafts indicated that the team members had performed significant research for the papers. Each team member received multiple tips or suggestions for improving his or her paper. For example, a team member suggested using tables for the financial statements to increase ease of reading. Another member pointed out the importance of the SWOT analysis as part of the risk management plan. Conclusion Team C members completed the Implementation, Strategic Controls, and Contingency Plans assignment, provided feedback to each team member, and will use the feedback to finalize their individual paper. The exercise allows a team member to get a different perspective on the same assignment and receive valuable suggestions for improving the member’s work. Each team member’s paper is stronger due to this process. References Pearce, J.A. & Robinson, R.B. (2013). Strategic management: Planning for domestic and global competition (13th ed.). Retrieved from The University of Phoenix ebook collection database.
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