PPT1

CAPM stand for “Capital Asset Pricing Model” and is a

common valuation method for stocks.
The Capital Asset Pricing Model, or CAPM, calculates the
value of a security based on the expected return relative to
the risk investors incur by investing in that security.

TAGALOG
Ang CAPM ay nakatayo para sa "Modelo ng Pagpepresyo ng
Capital Asset" at isang karaniwang paraan ng pagtatasa para sa
mga stock.
Kinakalkula ng Modelo ng Pagpepresyo ng Capital Asset, o
CAPM, ang halaga ng isang seguridad batay sa inaasahang
pagbabalik na may kaugnayan sa panganib na natamo ng mga
namumuhunan sa pamamagitan ng pamumuhunan sa seguridad
na iyon.

PPT2
What are the basic assumptions of CAPM?
The basic assumptions of CAPM include perfect competition,
homogenous expectations among all investors, no taxes or
transaction costs, no market imperfections or monopolies, infinite
investor time horizons, and one risky asset with constant returns
over time.
TAGALOG
Kabilang sa mga pangunahing pagpapalagay ng CAPM ang
perpektong kumpetisyon, magkakatulad na inaasahan sa lahat ng
mamumuhunan, walang buwis o gastos sa transaksyon, walang
imperpeksyon o monopolyo sa merkado, walang katapusan na
abot-tanaw ng panahon ng mamumuhunan, at isang mapanganib
na asset na may patuloy na pagbabalik sa paglipas ng panahon.

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To calculate the value of a stock using CAPM, multiply
the volatility, known as "beta," by the additional compensation for
incurring risk, known as the "Market Risk Premium," then add the
risk-free rate to that value.
In layman's terms, the CAPM formula is: Expected return of the
investment = the risk-free rate + the beta (or risk) of the
investment * the expected return on the market - the risk free rate
(the difference between the two is the market risk premium).
For each additional increment of risk incurred, the expected return
should proportionately increase.
If a security is found to have a higher return relative to the
additional risk incurred, then the CAPM model suggests that it is a
buying opportunity.
Like all valuation models, CAPM has its limitations since some
assumptions it uses are idealistic.
For example, Beta coefficients are unpredictable, change over
time, only reflect systemic risk rather than total risk.
Despite its shortcomings, this model is very popular for valuing
securities.

PPT8
Problems with the CAPM
Unrealistic Assumptions

Several assumptions behind the CAPM formula have been

shown not to hold up in reality. Modern financial theory rests on
two assumptions:

1. Securities markets are very competitive and efficient (that is,

relevant information about the companies is quickly and
universally distributed and absorbed).
2. These markets are dominated by rational, risk-averse
investors, who seek to maximize satisfaction from returns on
their investments.

As a result, it’s not entirely clear whether CAPM works. The big
sticking point is beta. When professors Eugene Fama and
Kenneth French looked at share returns on the New York Stock
Exchange, the American Stock Exchange, and Nasdaq, they
found that differences in betas over a lengthy period did not
explain the performance of different stocks. The linear
relationship between beta and individual stock returns also
breaks down over shorter periods of time. These findings seem to
suggest that CAPM may be wrong.

TAGALOG
Maraming mga pagpapalagay sa likod ng pormula ng CAPM ang
ipinakita na hindi nananatili sa katotohanan. Ang modernong
teorya sa pananalapi ay nakasalalay sa dalawang pagpapalagay:
1. Ang mga merkado ng seguridad ay napaka-mapagkumpitensya
at mahusay (iyon ay, ang may-katuturang impormasyon tungkol
sa mga kumpanya ay mabilis at pangkalahatang ipinamamahagi
at hinihigop).
2. Ang mga pamilihang ito ay pinangungunahan ng mga
makatwiran, mahilig sa panganib na mamumuhunan, na
naghahangad na i-maximize ang kasiyahan mula sa mga
pagbalik sa kanilang mga pamumuhunan.
Bilang resulta, hindi lubos na malinaw kung gumagana ang
CAPM. Ang malaking sticking point ay beta. Nang tingnan ng mga
propesor na sina Eugene Fama at Kenneth French ang share
returns sa New York Stock Exchange, American Stock Exchange,
at Nasdaq, nalaman nila na ang mga pagkakaiba sa beta sa loob
ng mahabang panahon ay hindi nagpapaliwanag sa pagganap ng
iba't ibang mga stock. Ang linear na ugnayan sa pagitan ng beta
at indibidwal na pagbabalik ng stock ay sumisira din sa mas
maiikling yugto ng panahon. Ang mga natuklasang ito ay tila
nagmumungkahi na ang CAPM ay maaaring mali.

Including beta in the formula assumes that risk can be measured

by a stock’s price volatility. However, price movements in both
directions are not equally risky. The look-back period to
determine a stock’s volatility is not standard because stock
returns (and risk) are not normally distributed.

The CAPM also assumes that the risk-free rate will remain
constant over the discounting period. Assume in the previous
example that the interest rate on U.S. Treasury bonds rose to 5%
or 6% during the 10-year holding period. An increase in the risk-
free rate also increases the cost of the capital used in the
investment and could make the stock look overvalued.

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The Bottom Line
The CAPM uses the principles of modern portfolio theory to
determine if a security is fairly valued. It relies on assumptions
about investor behaviors, risk and return distributions, and market
fundamentals that don’t match reality. However, the underlying
concepts of CAPM and the associated efficient frontier can help
investors understand the relationship between expected risk and
reward as they strive to make better decisions about adding
securities to a portfolio.

TAGALOG
Ang Bottom Line
Ginagamit ng CAPM ang mga prinsipyo ng modernong teorya ng
portfolio upang matukoy kung ang isang seguridad ay
pinahahalagahan nang patas. Umaasa ito sa mga pagpapalagay
tungkol sa mga pag-uugali ng mamumuhunan, mga pamamahagi
ng panganib at pagbabalik, at mga pangunahing kaalaman sa
merkado na hindi tumutugma sa katotohanan. Gayunpaman, ang
pinagbabatayan na mga konsepto ng CAPM at ang nauugnay na
mahusay na hangganan ay makakatulong sa mga
mamumuhunan na maunawaan ang kaugnayan sa pagitan ng
inaasahang panganib at gantimpala habang nagsusumikap silang
gumawa ng mas mahusay na mga desisyon tungkol sa
pagdaragdag ng mga mahalagang papel sa isang portfolio.