Title

Financial Beta Tests

Publication Year

1982

Keywords

Finance, economics, stock pricing, stocks, Capital Assets Pricing Model

Disciplines

Business | Economics | Finance

Abstract

The stock market brings together needed and surplus funds. People invest their surplus funds in the stock market to gain a return on them. Investing, a sacrifice of present consumption for future consumption, is rewarded differently according to the different levels of risk involved in the investment. For example, real estate investments have a much higher reward and risk than investments in treasury bills. We are always looking for a model that can help us to invest our funds efficiently to ensure that we are rewarded sufficiently for the risk we bear. Yet, there is still no model we know of that can fully predict the future movements of stock process. However, certain theoretical models are introduced to try to relate the risk and return of certain stocks and then find out whether certain combinations of risk and return are efficient or not.

The paper is based on the Capital Assets Pricing Model (CAP) first developed by Professor William F. Sharpe. The first part of the paper will introduce the mathematical and statistical theories behind the model. The second part of the paper will be devoted to testing the CAP Model. Finally, the results of the tests performed are assesed as to the usefulness of this model as an abstraction from reality.

Department 1 Awarding Honors Status

Economics

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