Abstract
The paper defines CAPM and APT, comparing their advantages and disadvantages, and recommends APT for most applications, recognizing that significant resources may be required to support this.

From the Paper
"Finance professionals and investors have long sought reliable methods to determine which assets to buy and sell in order to make a profit. While various theories and techniques have been identified, tried and tested, a single approach that can be used in every situation with positive results has yet to be found. Two approaches; the capital asset pricing model (CAPM) and arbitrage pricing theory (APT) are commonly used. Both have their advantages and disadvantages as they attempt to quantify what some consider..."

Tags:capital asset pricing model, arbitrage pricing theory, CAPM, APT

Abstract
This paper talks about dividend growth models, in particular the Gordon Growth model and the assumptions that one needs to take in the calculations. The paper includes the characteristics and limitations of dividend growth models and talks about CAPM, or the capital asset pricing model, which is based on three main parameters: the risk - free rate, the stock's beta coefficient and the expected rate of return for the market as a whole, used to calculate the market risk premium. The author compares the two models and explains why the modern portfolio theory is base on CAPM notions.

From the Paper
"On the other hand, the CAPM is an easy to use and implement model, based on three main parameters: the risk - free rate, the stock's beta coefficient and the expected rate of return for the market as a whole, used to calculate the market risk premium. The model has a large applicability, mainly because it does not use dividend estimates for the future and thus works for organizations that do not pay regular dividends, but also because information on the three variables mentioned are usually public and thus one does not need to make additional estimates on the variables used. "

Tags:dividend growth models. growth rates, Modern Portfolio Theory

Abstract
The paper examines this theory which helps analysts to identify appropriate measures of risk for an efficient portfolio and defines the relationship between risk and return for efficient portfolio. The paper shows how the CAPM theory also estimates the measure of risk for an individual security or an inefficient portfolio and defines the relationship between risk and return for an individual security or inefficient portfolio. A worked example is supplied towards the end of the paper.

From the Paper
"The theory of CAPM (Capital Asset Pricing model) is based on several assumptions. The primary assumption while conducting the risk analysis of an investment portfolio is that the individuals are usually reluctant to take risk. It also assumes that the individuals search for ways to maximize the expected usefulness of their portfolios with a single planning period. Moreover, individuals have analogous expectations relating to the return on their investment portfolios. In other words, their subjective estimates regarding the means, variance and covariance of the investment returns are almost similar. Individuals can also freely borrow capital for investment and can lend capital as well. This borrowing can be made on a risk free rate of return. In addition to this, this theory also assumes that the market is operating under ideal conditions, no taxes are to be paid, transactions costs are almost negligible, securities are completely discernible and firms operate in an environment of perfect competition. Finally, quantity of risky securities can be easily determined."

Tags:market, return, transaction, cost, risk, security, investment, profit, premium

Abstract
The paper discusses how for a firm that is expanding, it is difficult to establish a proper growth rate for the DCF, since, if past growth rates in earnings and dividends have been relatively stable, and if investors appear to be projecting a continuation of past trends, then the growth rate may be based on the firm's historic growth rate. The paper explains, however, that if the company's past growth has been abnormally high or low, either because of its own unique situation or because of economic fluctuations, then the growth rate has to be estimated in some other manner.

From the Paper
"More individuals own stock more than ever. Stock pricing is now expansive and is an important aspect of financial economics. A stock is generally considered over-valued if the price-earning ratio is high relative to the rate at which a company's earnings are likely to grow. The converse holds true for an under-valued stock. Because of the complexity and importance of valuing common stock, various techniques for accomplishing this task have been devised over time. The sections that follow will compare and contrast the CAPM and DCF models. CAPM is an equilibrium theory that relates the expected return of an..."

Tags:capm, discounted, model

Abstract
"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."

Tags:risk, investment, analysis

Abstract
This paper compares and contrasts the capital asset pricing model (CAPM) and the discounted cash flow (DCF) model in valuing common stock. The paper holds that, because of the complexity and importance of valuing common stock, the above techniques have been devised over time to accomplish this task. It points out that CAPM focuses on inputs to calculate stock prices that are external to the firm while the DCF model focuses on internal factors. Also, CAPM is concerned with growth rate, while DCF is concerned with estimated returns. The paper concludes that both models are important to investors and expanding companies.

From the Paper
"For a firm that is expanding, it is difficult to establish a proper growth rate for the DCF. If past growth rates in earnings and dividends have been relatively stable, and if investors appear to be projecting a continuation of past trends, then the growth rate may be based on the firm's historic growth rate. However, if the company's past growth has been abnormally high or low, either because of its own unique situation or because of economic fluctuations, then the growth rate has to be estimated in some other manner."

Tags:stocks, investment, stock, market

Abstract
This paper explains that the capital asset pricing model (CAPM) and the arbitrage pricing theory (APT) both depend on the identification and quantification of risk vis-a-vis a given financial device or product and thereby a financial product's volatility. The author points out that the primary assumption of the CAPM is that there exists a relationship between risk and the expected rate of return (ERR) and this relationship is then factored into the pricing structure of financial securities. The paper relates that APT is a model that relies on the integration of several factors at once rather than bundling all factors into a single beta. The paper concludes that the APT is the model of preference because the APT is the only valuation model, which can account for the full spectrum of market and asset-specific factors that can affect price and risk determination within the context of the global economy.

Table of Contents:
Overview
The Capital Asset Pricing Model
The Arbitrage Pricing Theory

From the Paper
"There are several weaknesses with the CAPM, which has limited its effectiveness in the financial services industry. The most prominent of these weaknesses is that it is primarily a single-factor risk assessment method which relies on a single covariance to the overall financial market the security is traded in. This single covariance is the CAPM's beta which is effective in ideal market conditions but when extra-market factors affect change in the market or to the industry in which the security functions, this single-factor aspect becomes less accurate because it cannot accommodate such variance."

Tags:identification quantification risk, rate of return, integration

Abstract
The paper discusses how the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) are both valid models utilized by financial professionals in determining an appropriate market price or value of a given financial product or commodity. The paper posits that it is important to note that without one or the other, financial industry professionals could not adequately determine the value of a financial device and, consequently, the financial markets would quickly fall into chaos.

From the Paper
"The Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) are both valid models utilized by financial professionals in determining an appropriate market price or value of a given financial product or commodity. It is important to note that without one or the other, financial industry professionals could not adequately determine the value of a financial device and, consequently, the financial markets would quickly fall into chaos. However, much debate in the financial industry..."

Tags:arbitrage, pricing, theory

Abstract
This paper goes over several details of information from stock earnings to p/e ratios and the CAPM equation. It is very detailed as far as the equations used and I have uploaded an excel file for reference to aid in the explanation.

From the Paper
U.S. Bond Market Training Document Bonds tend to be one of the most stable investments in an unstable economy. In fact the trends of an economy can be determined by watching the sales of bonds. As bonds sales increase then it is probable that something might be going on to increase the instability of that economy and therefore make investors conservative in their investment practices. This is also true when the sales of bonds go down. Often this is a sign that things are going well and even though stocks are more fragile and contain higher risk factors that these factors have been forgone, to some degree, for a short period of time. Often this is all it takes for investors to gain short returns on stocks in which they might normally not have invested.

Tags:investments, stock, bonds

Abstract
This paper explains how Arbitrage Pricing Theory and Capital Asset Pricing Model Theory work and then, in order to determine which theory seems to work better for an investor, the paper makes a comparison and analysis of the two theories.

From the Paper
"Any Asset Pricing Theory forms the basic foundation of finance theory, in that it deals with the value of any asset under unknown or uncertain circumstances. The relationship between an asset and its price is the mainstay of the asset pricing theory: the lower the price, the poorer the expected performance. The Arbitrage Pricing Theory derives from this theory. The basic idea in the APT theory is that any sort of risk in asset returns must not affect the pricing of the asset in any way; it must depend on the covariance of assets with the risk factors. (Bayesian Approach of the Arbitrage Pricing Theory) The APT originated from Stephen Ross, 1976-1978. Ross had used a statistical procedure for assets returns, with the belief that there are in existence no arbitrage probabilities. The APT must of necessity involve a lot of risk taking processes, (Definition of Arbitrage Pricing Theory.)

Tags:economic, stocks, ownership, proprietary, rights, profits, expected, returns, beta, concept