Find and summarize the 5FM Model proposed by different researchers.

1: CAPM (capital asset pricing model)

Capital asset pricing model is most used model in finance, CAPM shows the relationship
between the systematic risk and expected return. It shows that the expected return on a security is
equal to the risk-free return plus a risk premium, which is based on beta of security if beta is
equal to then its moving along the market portfolio ,and going with the flow of market, normal
beta if beta is greater than 1 it’s called aggressive beta example if market is changing at 10% it
will go more than 10% and it has more risk more return. If beta is less than 1 it’s called defensive
beta low risk low profit low risk taking. There are two type of risk in capm model systematic the
risk which is present with in a system like fuel price it can’t be eliminated and the other is
unsystematic risk which can be eliminated it is a risk of individual or which is associated with
the single company or industry. It is widely used to finance pricing risky securities and generate
expected return. Investor expect to compensate for risk and time value of money.
Three factor of capm
 market risk premium shows the difference between the expected return on a market portfolio
and the risk-free rate
 size premium: tendency for the stocks of firms with smaller market capitalizations to
outperform the stocks of firms with larger market capitalizations
 Value premium: Refers to the greater risk-adjusted return of value stocks over growth stocks.

2: Fame French model

Fama is an asset pricing model that expands on the capital asset pricing model CAPM by adding
size risk and value risk factors to the market risk factor in CAPM. This model considers the fact
that value and small cap stocks outperform markets on a regular basis. By including these two
additional factors, the model adjusts for this outperforming tendency, which is thought to make it
a better tool for evaluating manager performance. Fama and French as three factors
 Size of the firm
 Book to market value
 Excess return on market

The Fama and French Three Factor model highlighted that investors must be able to survive the
extra unpredictability and broken underperformance that could occur in the short term. Investors
with a long term time horizon of 15 years or more will be rewarded for losses suffered in the
short term. The main factors driving expected returns are sensitivity to the market, sensitivity to
size, and sensitivity to value stocks, as measured by the book to market ratio. Any additional
average expected return may be attributed to unpriced or unsystematic risk.

3: Single Index Model (SIM)

The single-index model (SIM) is a simple asset pricing model to calculate both the risk and the
return of a stock. The model has been developed by William Sharpe in 1963 and is used in the
finance industry. We can also say that the returns on a security can be represented as a linear
relationship with any economic variable relevant to the security.
The single index model assumes that there is only 1 macroeconomic factor that causes the
systemic risk affecting all stock returns and this factor can be represented by the rate of return on
a market index.

4: Capital market line (cml)

The Capital Market Line is a graphical representation of all the portfolios that optimally combine
risk and return. CML is a theoretical concept that gives optimal combinations of a risk-free asset
and the market portfolio. The CML is superior to Efficient Frontier in the sense that it combines
the risky assets with the risk-free asset. CML shows a specific portfolios rates of return and total
risk.

According to the Youssef LOURAOUI An optimal portfolio is a set of assets that maximizes the
tradeoff between expected return and risk: for a given level of risk, the portfolio with the highest
expected return, or for a given level of expected return, the portfolio with the lowest risk.

5: Forecasting Model

Forecasting is one of the most important tasks that the forecasting department takes care of on a
regular basis. It is typically used to predict future revenues, expenses, and capital costs. Financial
models used for forecasting are often compared to the actual budget to review performance in
survey. Here are four financial model examples used for forecasting:
 Straight Line Model: This is the simplest forecasting model that exists. It makes use
historical data to estimate what will happen in the future. For example, if your company
has experienced a 4% annual increase in revenue for the last three years, the straight-line
model would forecast a 4% annual increase for the following year
 Moving Average Model is a forecasting model its strength lies in its ability to smooth out
data. Typically, companies use the moving average model to evaluate performance on a
monthly basis and makes use of three-month and five-month moving averages.
 Linear Regression Model this forecasting method is best used to compare the relationship
between two different variables. A common example is advertising budget and revenue.
If your advertising budget increases, you can expect your revenue to increase. A linear
regression model will help you determine exactly how advertising and revenue correlate
with each other, which can be used for forecasting.
 Time Series Model This is the most complicated method of forecasting time series
modeling attempts to identify patterns in historical data and uses these patterns for
forecasting. Most modern approaches to time series forecasting make use of machine
learning or specialized software like Tidemark.