Compares two methods of assessing the risk of investments.
Written in 2005; 900 words; 4 sources; $ 35.95
Paper Summary:
"This paper compares two methods of assessing the risk of investments, the Capital Asset Pricing Model and a competing approach for asset pricing called the Arbitrage Pricing Theory, which was developed to address some of the criticisms of the CAPM. The paper considers which is preferable and why this may be so, based on how each is used and how their validity is established.
From the Paper:
"The Capital Asset Pricing Model is not the only asset pricing model around. One of the competing approaches asset pricing is called the Arbitrage Pricing Theory, which was developed to address some of the criticisms of the CAPM. The issue is which of the two approaches is the best and why. The CAPM is a model that describes the relationship between risk and expected return, a model that is used in pricing risky securities. According to this model, the expected return of a security is equal to the rate on a risk-free security plus a risk premium, and the investment should only be made it the return meets or beats the required return (Capital Asset Pricing Model - CAPM, 2005, para. 1). Risk is demonstrated here according to how closely a stock's price follows the market as a whole."
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