Financial Economics Essay

851 words - 4 pages

(1) The Capital Asset Pricing Model (CAPM) is one tool investors and financial advisers use to try to determine how investments will perform and to try to price and assess them accordingly. However, like all mathematical models that seek to predict events in the real world, it suffers from some methodological limitations.
Many of the limitations to the CAPM lie in its methodological assumptions. Under these assumptions, “the only difference between investors is the amount of wealth they must invest and the personal trade-off they make between portfolio mean and portfolio variance”(Levy and Post). However, it is not possible in the real world. There are many other factors influence returns of the portfolio, for example, the inflation rate.
Different investors make different choices. According to Levy and Post, one of these assumptions requires that all investors have access to the same information. Their investment cost is an aspect to determine their efficient portfolio. In additional, the assumption of the expectations regarding asset returns and frictionless asset markets are unreasonable. All investors choose their portfolio according to the mean-variance criterion, without other preferences (Levy and Post). The fact is that not all investors will prefer high returns to low returns and choose securities with low risks rather than high risks. It cannot simply equate them because every investor is bound to have his own preference.
As the returns on securities are related to the market portfolio return, the CAPM cannot be applied in a diversified environment.

(2)Roll’s critique is a famous analysis of early empirical tests of the Capital Asset Pricing Model by Richard Roll.
E(Ri) = Rf + βi [ E(Rm) – Rf ]
In the equation, E(Ri) means the expected return on security I, Rf represents the risk-free return, βi states the asset covariance and Rm indicates the market portfolio return. The expected return on the true market is used to assess the investment portfolio.
Roll’s critique argues two statements regarding the market portfolio. Firstly, the market portfolio is unobservable. Every security’s observed average return is βi ‘s linear functions. According to Levy and Post, “the market portfolio will almost always be ex-post mean-variance-inefficient, even if the market portfolio is ex-ante efficient’. It is a mathematical fact that observed average return would be located on a measured security market line. The only way to avoid this situation is that the market portfolio is not in efficient set at the start. However, it does not represent that the empirical tests of the...

Find Another Essay On financial economics

Business Major Essay

871 words - 4 pages came to realize that one can do a lot with the course. Business Economics help a learner acquire the relevant knowledge and skills needed to work as an economic analyst, consultant, budget analyst, banker, or financial analyst in the applicable organizations among other options. Apart from the job issue, it interests to major in Business Economics, as it has the capacity to expand my postgraduate options. With a major in the course, I can

Return of Depression Economics - Book Review

841 words - 4 pages page in the New York Times and has been named columnist of the year by the Editor and Publisher magazine. Krugman is well-known for his outspoken criticism of the Bush Administration. This book was written in light of the 2008 financial crisis (The 2008 book is an updated version of his 1999 work), The Return of Depression Economics and draws parallels between the 2008 financial crisis and the Great Depression and essentially, Krugman proves

Financial development & economic growth

2451 words - 10 pages of economist strongly disagree with the fact that financial sector have any role to play in economic growth. The "pioneers of development economics" including Miers and Seers (1984) and Nobel Laureate Robert locus (988, P.6), have totally ignored finance as an "over stressed" determinant of economic growth. The famous argument by Joan Robinson (1952 p.86) "where enterprise leads finance follows", has totally removed finance from the list of

Opportunity Cost

615 words - 2 pages ). As for Phil, he has a comparative advantage making telephone calls since he is capable of making eight (8) calls in sixty minutes compared to only one (1) financial statement in a period of sixty minutes. Francis has a comparative advantage in producing financial statements since she is capable of producing four (4) statements in a sixty minutes compared to Phil's one (1) statement. On the other hand, she also has a comparable advantage in making telephone calls for the reason that she can produce two (2) more calls than Phil and an hour's time.Reference:O'Sullivan, Arthur & Sheffrin, Steven (2006). Economics Principles and Tools 4th Edition.Upper Saddle River N.J.

Ben Bernanke

695 words - 3 pages the greatest recession of recent times. Bernanke has a lot of economic crisis exposure and would be able to offer great decisions and advice to turn the economic woes into economic wins. Bernanke oversaw the 12 US Reserve Banks and has immense exposure to global financial institutions all across the world. He monitored the financial system as a whole for possible risks to its stability. Bernanke is an adamant leader who believes in educating

Students Should Be Taught Home Economics

1576 words - 6 pages still has many important skills to teach and prepare all students for their future. “The loss of Home Economics and shop is a devastating loss not only for our young people, but for our culture. Many of our high school, and college graduates don’t have a clue about healthy eating and cooking, or about budgeting, planning, how credit works, and basic financial management” (When We Can’t). Home EC is a dying class. It was mandatory in the past so

Career in Financial Management

1314 words - 5 pages finance occupation. Occupations such as an auditor, loan officer, accountant, financial analyst or securities sale agent are a plus. Degree in economics, accounting, finance, or administration in business is the least required degrees need for a financial manager. In most cases now a lot of employers now look for people with a master’s degree in economics, finance, or business administration. These types of programs will assist a student in

Global financial crisis

831 words - 4 pages plan to protect country economics. Government deregulation in financial market had precedents back in last century. In 1981, the Reagan-administration was supported by economics and financial lobbies and started thirty-period financial deregulation. Later, the Reagan-administration also deregulated the savings loan company and allowed them using deposit money to do risk investment. But by the end of 80s, hundreds of company failed. It has been

Common Sense Economics: What Everyone Should Know About Health and Prosperity

1825 words - 8 pages a textbook allowing reader from various spectrums understand the concepts. The purpose of this book was to inform people on how the economy works what can be done to generate wealth, and how to make sound economic choices and financial decisions. Overall, this book achieves it purpose of introducing the basic principles of economics, or common sense as referred to in the text, but it also allows advanced students the opportunity to see the

The Rich Cost of Poor Mathematics Education

932 words - 4 pages mostly on the microeconomics within a family unit and the instruction of consumers in areas such as banking and financial planning. Classes like this were once a staple in American education and helped students learn how to manage their finances, live on a budget and balance a checkbook. Increasingly, many public high schools, including the one I graduated from, are cutting out classes like consumer economics on the basis that the math contained


986 words - 4 pages 1 "The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."Thomas SowellBackgroundEconomics is the study and understanding of the economy or the system of government and people that deals with money and financial effects. Economists have traditional concerns, which are illustrated above. The concerns of

Similar Essays

Financial And Monetary Economics Essay

2364 words - 9 pages Financial and Monetary Economics ‘‘Should we consider the Stock Market an efficient market.’’ In theory the Stock Market is said to be efficient as stock prices should follow a random walk, which, means that stock price changes should be random and unpredictable, If stock prices were predictable then this would prove that the stock market is inefficient as this implies that all available information was not already

A Very Promising Discipline: Economics At Msu

1255 words - 6 pages research community, and we want to understand every aspect of society. So, social practice is an essential tool for economics. We need to use our tool to solve social problem, like how to create jobs in nation or what affect if we raise the minimum wage. We collect data to make graphs, then use those data and graphs to analysis how to make a society works better through currency policy and financial policy. Like every government hires economists to

Statement Of Interest Essay

631 words - 3 pages I am applying for admission into the MA program in economics at McGill University, because I want to prepare myself for a rigorous study in PhD economics program. My short-term and mid-term objectives are to gain admission into and pass all requirements of the graduate program. In the long-run, I plan to be hired as a faculty member by the research oriented university in USA or Canada. My academic background consists of a four-year

Contagion Effect Among Financial Institutions And Sovereign Credit Default Swap Of Pakistan; State Dependent Sensitivity Analysis Value At Risk Ap

4087 words - 17 pages real effects of financial constraints: evidence from a financial crisis. Journal of Financial Economics, 97, 470-487. Committee on the Global Financial System (2011). The impact of sovereign credit risk on bank funding conditions, CGFS Working Papers 43. Committee on Global Financial System. Bank for International Settlements press. Diamond, D. W., & Rajan, R. G. (2005). Liquidity shortages and banking crises. The Journal of Finance, 60, 615–647