Capital Asset Pricing Model &

Commidity Market

Name:- Meghna Poojary

Beerupaksha Nayak
TYBMS
 Capital Asset Pricing Model
What is the Capital Asset Pricing
Model – CAPM?
The capital asset pricing model (CAPM) is a
model that describes the relationship between
systematic risk and expected return for assets,
particularly stocks. CAPM is widely used
throughout finance for the pricing of risky
securities, generating expected returns for
assets given the risk of those assets and
calculating costs of capital.
 Birth of a Model
The capital asset pricing model contains two types of
risk:
1.Systematic Risk– These are market risks that cannot be
diversified away. Interest rates, recessions and wars are
examples of systematic risks.
2.Unsystematic Risk – Also known as "specific risk," this risk
is specific to individual stocks and can be diversified away as
the investor increases the number of stocks in his or her
portfolio. In more technical terms, it represents the
component of a stock's return that is not correlated with
general market moves.
Modern portfolio theory shows that specific risk can
be removed through diversification. The trouble is that
diversification still doesn't solve the problem of
systematic risk; even a portfolio of all the shares in
the stock market can't eliminate that risk. Therefore,
when calculating a deserved return, systematic risk is
what plagues investors most. CAPM, therefore,
evolved as a way to measure this systematic risk.
The Formula
Sharpe found that the return on an individual
stock, or a portfolio of stocks, should equal
its cost of capital. The standard formula
remains the CAPM, which describes the
relationship between risk and expected
return.
 Commodity Market
WHAT IT IS:
A commodity market is a place where buyers and sellers
can trade any homogenous good in bulk. Grain, precious
metals, electricity, oil, beef, orange juice and natural gas
are traditional examples of commodities, but foreign
currencies, emissions credits, bandwidth, and certain
financial instruments are also part of today's commodity
markets.
According to the New York Mercantile Exchange: "A
market will flourish for almost any commodity as long
as there is an active pool of buyers and sellers. There
is no telling what will lubricate the wheels of
commerce -- cat pelts were once a hot item in St.
Louis, and today dried cocoons are a major
exchange-traded commodity in Japan."
 HOW IT WORKS (EXAMPLE):

Buyers and sellers can trade a commodity either in the

spot market (sometimes called the cash market),
whereby the buyer and seller immediately complete their
transaction based on current prices, or in the futures
market.
There are six major commodity exchanges in the U.S.:
The New York Mercantile Exchange, the Chicago Board
of Trade, the Chicago Mercantile Exchange, the Chicago
Board of Options Exchange, the Kansas City Board of
Trade, and the Minneapolis Grain Exchange. The New
York Mercantile Exchange Inc. is the world's largest
physical commodity futures exchange. When the hours
for open outcry and electronic trading are combined,
some exchanges are open for nearly 22 hours a day.
 WHY IT MATTERS:

Commodities are the raw materials used by virtually

everyone. The orange juice on your breakfast table, the
gas in your car, the meat on your dinner plate and the
cotton in your shirt all probably interacted with a
commodities exchange at one point. Commodities-
exchange prices set or at least influence the prices of
many goods used by companies and individuals around
the globe. Changes in commodity prices can affect entire
segments of an economy, and these changes can in turn
spur political action (in the form of subsidies, tax
changes or other policy shifts) and social action (in the
form of substitution, innovation or other supply-and-
demand activity).
Most buyers and sellers trade commodities on the
futures markets because many commodityproducers,
especially those of traditional commodities like grain,
bear the risk of potentially negative price changes when
their products are finally ready for the market. Futures
contracts, whereby the buyer purchases the obligation to
receive a specific quantity of the commodity at a specific
date, therefore offer some price stability to commodity
producers and commodity users.